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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-5358
SUNDSTRAND CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-1840610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4949 HARRISON AVENUE
P.O. BOX 7003
ROCKFORD, ILLINOIS 61125-7003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (815) 226-6000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON WHICH THE COMMON
TITLE OF EACH CLASS STOCK AND RIGHTS ARE REGISTERED
Common stock $.50 par value New York Stock Exchange
Common stock purchase rights Chicago Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. / /
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
$2,176,494,445 as of February 20, 1996.*
*For purposes of this calculation, the Registrant has assumed that its
directors and executive officers are affiliates.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
30,800,861 shares of common stock outstanding at February 20, 1996.
DOCUMENTS INCORPORATED BY REFERENCE.
List hereunder the following documents if incorporated by reference and the
part of the Form 10-K into which the document is incorporated: (1) Any annual
report to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.
DOCUMENT FORM 10-K REFERENCE
Portions of Registrant's Annual Report to Parts I and II; Part III,
Stockholders for the fiscal year ended Item 10; and Part IV,
December 31, 1995 Item 14(a)(1)
Portions of Registrant's Proxy Statement Part III
for Annual Meeting of Stockholders to be
held April 16, 1996
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CROSS-REFERENCE TABLE OF CONTENTS
Registrant's Annual Report to Stockholders for the fiscal year ended December
31, 1995, and Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held April 16, 1996, including all information required in
Parts I, II, III and IV of Form 10-K. The Cross-Reference Table of Contents set
forth below identifies the source of incorporated material for each of the Form
10-K items included in Parts I, II, III and IV. Only those sections of the
Annual Report to Stockholders and the Proxy Statement cited in the
Cross-Reference Table are part of this Form 10-K and filed with the Securities
and Exchange Commission.
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FORM 10-K ITEM NO. INCORPORATED BY REFERENCE FROM:
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PART I.
Item 1. Business
(a) General Development of Business Annual Report to Stockholders, information regarding
the restructuring of the Aerospace segment on pages 2,
11, 25, 26, 27, 28, 30, 32, 35, 37, 39 and 47;
information regarding the Company's joint venture with
Labinal, Inc. on pages 8, 15 and 27; information on sale
of majority interest in Advanced Power Technology, Inc. on
pages 11, 26, 27 and 28; information on sale of Spectronic
Instruments, Inc. on pages 19, 26, 27 and 28; information on
foreign operations and activity on page 27; and information
regarding date of incorporation on page 46.
Subsequent to the date of the material incorporated by
reference herein, the Registrant determined to reorganize
Milton Roy Company in order to more properly align its product
lines with specific market segments. Sundstrand Fluid
Handling Corporation, a new subsidiary of Registrant, will
focus on business growth in the markets served by the former
Fluid Handling Division. The Milton Roy Metering Pump Group,
consisting of Milton Roy Company and two subsidiaries, will
continue to serve the metering pump market.
(b) Financial Information About Annual Report to Stockholders, information by business segment
Industry Segments on pages 25-26 and 34-35.
(c) Narrative Description of Business Annual Report to Stockholders, pages 6-29; information
regarding the development of the auxiliary power unit
products on pages 15 and 27; information on foreign
operations and activity on pages 27 and 34-35; information
on unfilled orders on pages 27 and 47; information regarding
significant customers on pages 29 and 36; information
regarding research and development expenditures on pages 29
and 43; information regarding contracts with or for the
government on pages 29 and 44; information regarding
environmental matters on pages 43-44; information regarding
materials and supplies, intellectual property rights and
competition on page 46; and information regarding the number
of employees on page 47.
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FORM 10-K ITEM NO. INCORPORATED BY REFERENCE FROM:
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(d) Financial Information About Annual Report to Stockholders, information on foreign operations
Foreign and Domestic Operations and activity on pages 27 and 34-35; information on divestitures on
and Export Sales page 27; information regarding foreign and domestic operations on
pages 34-35; and information regarding foreign earnings and assets
on page 35 and 40-41.
Item 2. Properties Annual Report to Stockholders, information regarding reduction of
Aerospace plant capacity on pages 2, 26 and 37; and information
regarding properties on page 46.
Item 3. Legal Proceedings Annual Report to Stockholders, information regarding income tax
matters on page 41; and information regarding environmental matters
on pages 43-44.
Item 4. Submission of Matters to a Vote of (Not Applicable).
Security Holders
Executive Officers of the Registrant Annual Report to Stockholders, information regarding officers on
page 49.
PART II.
Item 5. Market for the Registrant's Common Annual Report to Stockholders, information regarding the stock split
Equity and Related Stockholder Matters payable as a 100 percent stock dividend on pages 2, 28, 30, 35, 44
and 47; information regarding dividends on pages 2, 30, 31, 44 and
47; information regarding restrictions on dividend payments on page
41; information regarding Registrant's Common Stock price range on
pages 44 and 47; information regarding the number of common
stockholders on page 47; and information regarding exchange listings
on page 50.
Item 6. Selected Financial Data Annual Report to Stockholders, page 47; information regarding the
stock split payable as a 100 percent stock dividend on pages 2, 28,
30, 35, 44 and 47; information regarding the restructuring of the
Aerospace segment on pages 2, 11, 25, 26, 27, 28, 30, 32, 35, 37,
and 39; information regarding the sale of Sundstrand Data Control
Division to AlliedSignal, Inc. on pages 27, 28, 37, 39 and 47;
information regarding a reduction of depreciation expense related
to a change in depreciable lives on pages 38 and 47; and
information regarding provisions for interest for asserted tax
deficiencies on pages 41 and 47.
Item 7. Management's Discussion and Analysis of Annual Report to Stockholders, pages 25-29.
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data Annual Report to Stockholders, pages 30-45 and 47.
Item 9. Changes in and Disgareements with Accountants on (Not Applicable).
Accounting and Financial Disclosure
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FORM 10-K ITEM NO. INCORPORATED BY REFERENCE FROM:
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PART III.
Item 10. Directors and Executive Officers of the Annual Report to Stockholders, pages 48-49; Proxy
Registrant Statement, pages 2-6; and information under the caption
"Section 16 Compliance" on page 25.
Item 11. Executive Compensation Proxy Statement, information regarding director compensation on
pages 8-9; information under the caption "Compensation Committee
Interlocks and Insider Participation" on page 11; and information
under the captions "Summary Compensation Table," "Option Grants in
Last Fiscal Year," "Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values," "Retirement Plans" and
"Employment Agreements" on pages 16-24.
Item 12. Security Ownership of Certain Proxy Statement, information under the caption "Ownership of
Beneficial Owners and Management Sundstrand Common Stock" on pages 7-8.
Item 13. Certain Relationships and Related Proxy Statement, inofrmation under the caption "Loans" on pages
Transactions 24-25.
PART IV.
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K
(a)(1) Financial Statements Annual Report to Stockholders, the following Consolidated Financial
Statements of Registrant and subsidiaries on pages 30
through 45.
Consolidated Statement of Earnings for the years
ended December 31, 1995, 1994, and 1993
Consolidated Statement of Cash Flows for the years
ended December 31, 1995, 1994, and 1993
Consolidated Balance Sheet as of December 31, 1995 and 1994
Consolidated Statement of Shareholders' Equity for the years
ended December 31, 1995, 1994, and 1993
Information by Business Segment for the years
ended December 31, 1995, 1994, and 1993
Quarterly Results (Unaudited) for 1995 and 1994
Notes to Consolidated Financial Statements
Management's Report
Independent Auditor's Report
(a)(2) Financial Statement Schedules The schedules have been omitted as the required information is
not applicable, or not required.
</TABLE>
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PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 3. Exhibits
(3) Articles of Incorporation and By-Laws
(a) Registrant's Restated Certificate of Incorporation as
effective December 19, 1991 (filed as Exhibit (3)(a) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991, File No. 1-5358, and incorporated
herein by reference).
(b) Registrant's By-Laws, including all amendments, as
effective October 1, 1995 (filed as Exhibit (3)(c) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, File No. 1-5358, and
incorporated herein by reference).
(4) Instruments Defining the Rights of Security Holders, including
Indentures
(a) Credit Agreement dated as of January 28, 1993, among
Registrant and seven banking institutions including Morgan
Guaranty Trust Company of New York, as Agent (filed as
Exhibit (4)(a) to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992, File No.
1-5358, and incorporated herein by reference).
(b) Amendment No. 1 dated October 15, 1993, and Amendment No. 2
dated October 31, 1994, to Credit Agreement dated as of
January 28, 1993, among Registrant and seven banking
institutions (filed as Exhibit (4)(b) to Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-5358, and incorporated
herein by reference).
(c) Amendment No. 3 dated November 30, 1995, to Credit Agreement
dated as of January 28, 1993, among Registrant and seven
banking institutions.
(d) Second Amended and Restated Rights Agreement between
Registrant and Harris Trust and Savings Bank, as Rights
Agent, dated November 21, 1995 (filed as Exhibit 1 to
Registrant's Form 8-A/A (Amendment No. 2) dated November
27, 1995, File No. 1-5358, and incorporated herein by
reference).
(e) First Amendment to Second Amended and Restated Rights
Agreement between Registrant and Harris Trust and
Savings Bank, as Rights Agent, dated February 20, 1996.
(f) Lease dated as of December 14, 1987, between Registrant and
Greyhound Real Estate Investment Six, Inc. (filed as
Exhibit (4)(f) to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1987, File No.
1-5358, and incorporated herein by reference).
(g) Note Agreement of Registrant dated May 15, 1991 (filed as
Exhibit (19)(c) to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991, File No. 1-5358,
and incorporated herein by reference).
(h) Amendment effective December 31, 1991, to Registrant's Note
Agreement dated as of May 15, 1991 (filed as Exhibit
(19)(c) to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1992, File No. 1-5358, and
incorporated herein by reference).
(i) Amendment and Restatement dated May 15, 1991, of
Registrant's Note Agreement dated January 18, 1980 (filed
as Exhibit (19)(d) to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991, File No. 1-5358,
and incorporated herein by reference).
(j) Amendment effective December 31, 1991, to Registrant's May
15, 1991, Amended and Restated Note Agreement (filed as
Exhibit (19)(d) to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1992, File No.
1-5358, and incorporated herein by reference).
(k) Note Agreement of Registrant dated October 31, 1991 (filed
as Exhibit (4)(l) to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991, File No.
1-5358, and incorporated herein by reference).
(l) Amendment dated December 1, 1995, to Registrant's Note
Agreement dated October 31, 1991.
(m) Note Agreement of Registrant dated December 2, 1991 (filed
as Exhibit (4)(m) to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991, File No.
1-5358, and incorporated herein by reference).
(n) Amendment dated December 11, 1995, to Registrant's Note
Agreement dated January 18, 1980, as amended and restated
May 15, 1991, Registrant's Note Agreement dated May 15,
1991, as amended December 31, 1991, and Registrant's
Note Agreement dated December 2, 1991.
(10) Material Contracts
(a) Employment Agreement dated September 19, 1995, between
Registrant and Robert H. Jenkins, Registrant's President
and Chief Executive Officer, effective October 1, 1995
(filed as Exhibit (10)(a) to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995, File
No. 1-5358, and incorporated herein by reference).*
*Management contract or compensatory plan.
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(b) Employment Agreement dated September 19, 1995, between
Registrant and Don R. O'Hare, Registrant's Chairman of the
Board, effective October 1, 1995 (filed as Exhibit 10(b) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, File No. 1-5358, and incorporated
herein by reference).*
(c) Employment Agreement dated October 3, 1994, between
Registrant and Don R. O'Hare, Registrant's Chairman of
the Board (filed as Exhibit (10)(b) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, File No. 1-5358, and incorporated
herein by reference).*
(d) Agreement dated September 24, 1994, between Registrant and
Harry C. Stonecipher, Registrant's former Chairman of the
Board, President and Chief Executive Officer, providing for
Mr. Stonecipher's early retirement from his employment with
the Registrant (filed as Exhibit (10)(a) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, File No. 1-5358, and incorporated
herein by reference).*
(e) Agreement dated June 19, 1988, between Registrant and Paul
Donovan, Registrant's Executive Vice President and Chief
Financial Officer, regarding Registrant's repurchase of
shares of restricted stock (filed as Exhibit (10)(h) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989, File No. 1-5358, and incorporated
herein by reference).*
(f) Amended and Restated Employment Agreement dated August 18,
1992, between Registrant and Robert J. Smuland,
Registrant's Executive Vice President and Chief Operating
Officer, Aerospace (filed as Exhibit (19)(a) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992, File No. 1-5358, and incorporated
herein by reference).*
(g) Form of Employment Agreement, including amendment thereto,
between Registrant and each of Paul Donovan, Registrant's
Executive Vice President and Chief Financial Officer,
Berger G. Wallin, Registrant's Executive Vice President
for Special Projects, Richard M. Schilling, Registrant's
Vice President and General Counsel and Secretary, and
DeWayne J. Fellows, Registrant's Vice President and
Controller (filed as Exhibit (10)(g) to Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, File No. 1-5358, and incorporated
herein by reference).*
(h) Employment Agreement dated February 21, 1995, between
Registrant and Patrick L. Thomas, Registrant's Executive
Vice President and Chief Operating Officer, Industrial
(filed as Exhibit (10)(j) to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994,
File No. 1-5358, and incorporated herein by reference).*
(i) Employment Agreement dated April 18, 1995, between
Registrant and James F. Ricketts, Registrant's Vice
President and Treasurer (filed as Exhibit (10)(a) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995, File No. 1-5358, and incorporated
herein by reference).*
(j) Amended and Restated Labinal/Sundstrand APU Agreement
dated October 3, 1994, between Registrant and Turbomeca
Engine Corporation regarding a jointly owned sales company
that markets and sells auxiliary power units for
commercial aerospace applications (filed as Exhibit
(10)(k) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, File No. 1-5358, and
incorporated herein by reference).
(k) Registrant's Stock Incentive Plan effective December 1,
1992 (filed as Exhibit (10)(l) to Registrant's Annual
Report for the fiscal year ended December 31, 1992, File
No. 1-5358, and incorporated herein by reference).*
(l) Text of resolution adopted by the Board of Directors of
Registrant on April 18, 1995, amending Registrant's Stock
Incentive Plan (filed as Exhibit (10)(b) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1995, File No. 1-5358, and incorporated herein by
reference).*
(m) Registrant's Nonemployee Director Stock Option Plan
effective August 1, 1994 (filed as Exhibit A to
Registrant's Proxy Statement dated March 7, 1995, File No.
1-5358, and incorporated herein by reference).*
(n) Registrant's Nonemployee Director Compensation Plan
effective August 1, 1994 (filed as Exhibit B to
Registrant's Proxy Statement dated March 7, 1995, File No.
1-5358, and incorporated herein by reference).*
*Management contract or compensatory plan.
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(o) Registrant's 1989 Restricted Stock Plan as adopted April 20,
1989, by the stockholders of Registrant (filed as Exhibit
(10)(v) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, File No. 1-5358, and
incorporated herein by reference).*
(p) Registrant's 1982 Restricted Stock Plan as adopted on April
15, 1982, by the stockholders of Registrant, including all
amendments through April 16, 1986 (filed as Exhibit (10)(c)
to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1982, File No. 1-5358, and
incorporated herein by reference).*
(q) Text of resolution adopted by the Board of Directors of
Registrant on April 17, 1986, amending Registrant's 1982
Restricted Stock Plan (filed as Exhibit (10)(c) to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1986, File No. 1-5358, and
incorporated herein by reference).*
(r) Text of resolution adopted by the Board of Directors of
Registrant on August 7, 1990, amending Registrant's 1982 and
1989 Restricted Stock Plans (filed as Exhibit (19)(f) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990, File No. 1-5358, and incorporated
herein by reference).*
(s) Text of resolution adopted by the Board of Directors of
Registrant on November 30, 1989, and December 1, 1989,
establishing an Officer Incentive Compensation Plan (filed
as Exhibit (10)(cc) to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1989, File No.
1-5358, and incorporated herein by reference).*
(t) Text of resolution adopted by the Board of Directors of
Registrant on February 19, 1991, amending Registrant's
Officer Incentive Compensation Plan (filed as Exhibit
(10)(hh) to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1990, File No. 1-5358,
and incorporated herein by reference).*
(u) Text of resolution adopted by the Board of Directors of
Registrant on July 16, 1989, adopting a Director Emeritus
Retirement Plan and copy of such plan as effective July 20,
1989 (filed as Exhibit (10)(dd) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1989, File No. 1-5358, and incorporated herein by
reference).*
(v) Text of resolution adopted by the Board of Directors of
Registrant on October 17, 1984, establishing a 1984
Elected Officers' Loan Program (filed as Exhibit (10)(i)
to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1984, File No. 1-5358, and
incorporated herein by reference).*
(w) Text of resolution adopted by the Board of Director of
Registrant on October 15, 1991, amending the 1984 Elected
Officers' Loan Program (filed as Exhibit (10)(ff) to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991, File No. 1-5358, and
incorporated herein by reference).*
(11) Computation of Fully Diluted Earnings Per Share (Unaudited) for
the quarters ended December 31, 1995 and 1994, and for the
years ended December 31, 1995 and 1994.
(13) Annual Report to Stockholders for the year ended December 31,
1995.
(21) Subsidiaries of Registrant
(23) Consents of Experts and Counsel
(a) Consent of Independent Auditors (Ernst & Young LLP).
(24) Powers of Attorney
(27) Financial Data Schedule
(99) Additional Exhibits
(a) Undertakings (filed as Exhibit (28)(a) to Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1982, File No. 1-5358, and incorporated
herein by reference).
(b) Reports on Form 8-K
Form 8-K dated November 27, 1995, regarding the adoption by Registrant
of the Second Amended and Restated Rights Agreement between Sundstrand
Corporation and Harris Trust and Savings Bank, as Rights Agent.
*Management contract or compensatory plan.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on this 6th day of
March, 1996.
SUNDSTRAND CORPORATION
(Registrant)
By /s/ Paul Donovan
---------------------------
Paul Donovan
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Robert H. Jenkins )
President and )
Chief Executive Officer )
)
Paul Donovan )
Executive Vice President )
and Chief Financial Officer )
)
DeWayne J. Fellows )
Vice President and Controller )
)
Don R. O'Hare )
Chairman of Board )
)
Gerald Grinstein )
Director )
)
Charles Marshall ) March 6, 1996
Director )
)
Klaus H. Murmann )
Director )
)
Donald E. Nordlund )
Director )
)
Thomas G. Powell )
Director )
)
John A. Puelicher )
Director )
)
Ward Smith )
Director )
)
Robert J. Smuland )
Director )
)
Berger G. Wallin )
Director )
By: /s/ Paul Donovan
-----------------------------------
Paul Donovan, Attorney-in Fact
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Exhibit (4)(c)
AMENDMENT NO. 3 TO CREDIT AGREEMENT
AMENDMENT dated as of November 30, 1995 among SUNDSTRAND CORPORATION (the
"Borrower"), the BANKS listed on the signature pages hereof (the "Banks") and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent").
W I T N E S S E T H :
WHEREAS, the parties hereto have heretofore entered into a Credit
Agreement dated as of January 28, 1993 (as amended, the "Agreement"); and
WHEREAS, the parties hereto desire to amend the Agreement to modify the
rates of interest and fees payable thereunder, to extend the term thereof and
to modify the covenants therein.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Agreement shall
have the meaning assigned to such term in the Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Agreement shall from and after the date hereof refer to the
Agreement as amended hereby.
SECTION 2. Amendment of the Agreement. The Agreement is amended as
follows:
(a) The schedule appearing in the definition of "Leverage Margin" in
Section 1.01 is changed to read as follows:
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"Leverage Ratio Leverage Margin
---------------------- ---------------
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Less than 0.475 0
0.475 or More but Less
Than 0.525 0.10%
0.525 or More 0.25%"
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(b) The date "January 28, 1998" appearing in the definition of
"Termination Date" in Section 1.01 is changed to "November 30, 1998".
(c) The schedule appearing in the definition of Commitment Fee Rate
in Section 1.01 is changed to read as follows:
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"Leverage Ratio Commitment Fee Rate
---------------------- -------------------
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Less than 0.475 0
0.475 or More but Less
Than 0.525 0.025%
0.525 or More 0.0625%"
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(d) The figure "0.40%" appearing in the definition of "CD Margin" in
Section 2.07(b) is changed to "0.35%".
(e) The figure "327.3(e)" appearing in the definition of "Assessment
Rate" in Section 2.07(b) is changed to "327.4(a)".
(f) The figure "0.275% appearing in the definition of "Euro-Dollar
Margin" in Section 2.07(c) is changed to "0.225%".
(g) The figures "0.125%", "0.55" and "0.20%" appearing in the first
sentence of Section 2.08(b) are changed to "0.10%", "0.475" and "0.125%",
respectively.
(h) The figure "0.58" in Section 5.08 is changed to "0.53".
(i) Section 5.09 is amended to read in its entirety as follows:
"SECTION 5.09. [Reserved]"
SECTION 3. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 4. Counterparts; Effectiveness. This Amendment may be signed in
any number of counterparts, each of which shall
<PAGE> 3
be an original, with the same effect as if the signatures thereto and hereto
were upon the same instrument. This Amendment shall become effective as of the
date hereof when the Agent shall have received duly executed counterparts
hereof signed by the Borrower and each of the Banks (or, in the case of any
party as to which an executed counterpart shall not have been received, the
Agent shall have received telegraphic, telex or other written confirmation from
such party of execution of a counterpart hereof by such party).
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
SUNDSTRAND CORPORATION
By /s/ James F. Ricketts
---------------------------------
Title: Vice President and
Treasurer
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By /s/ George Stapleton
---------------------------------
Title: Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By /s/ Patricia DelGrande
---------------------------------
Title: Managing Director
M&I MARSHALL & ILSLEY BANK
By /s/ Steven F. Geimer
---------------------------------
Title: Vice President
<PAGE> 4
MELLON BANK, N.S.
By /s/ Reginald T. Overton
---------------------------------
Title: Vice President
THE BANK OF NOVA SCOTIA
By /s/ F.C.H. Ashby
---------------------------------
Title: Senior Manager
Loan Operations
THE FIRST NATIONAL BANK OF
CHICAGO
By /s/ William J. Oleferchik
---------------------------------
Title: Authorized Agent
UNION BANK OF SWITZERLAND
By /s/ Douglas R. Elliot
---------------------------------
Title: Vice President
Corporate Banking
By /s/ Robert H. Riley III
---------------------------------
Title: Managing Director
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By /s/ George R. Stapleton
---------------------------------
Title: Vice President
<PAGE> 1
Exhibit (4)(e)
FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED RIGHTS AGREEMENT
This First Amendment (the "Amendment"), dated as of February 20, 1996, to
the Second Amended and Restated Rights Agreement, dated as of November 21, 1995
(the "Agreement"), is entered into by and between Sundstrand Corporation, a
Delaware corporation (the "Company"), and Harris Trust and Savings Bank, as
Rights Agent (the "Rights Agent").
The Company and the Rights Agent agree as follows:
1. Section 1(f) of the Agreement is hereby amended in its entirety to read
as follows:
(f) "Common Stock" shall mean the Common Stock, $.50 par value, of the
Company, except that "Common Stock" when used with reference to stock
issued by any Person other than the Company shall mean the capital stock
with the greatest voting power, or the equity securities or other equity
interest having power to control or direct the management of such Person
or, if such Person is a subsidiary or another Person, of the Person
which ultimately controls such first-mentioned Person and which has issued
and outstanding such capital stock, equity securities or equity interests.
2. Section 11(n) of the Agreement is hereby amended in its entirety to
read as follows:
(n) Anything in this Agreement to the contrary notwithstanding, in the
event that the Company shall at any time after the Amendment Date and
prior to the Distribution Date (i) declare a dividend on the outstanding
shares of Common Stock payable in shares of Common Stock, (ii) subdivide
the outstanding Common Stock, (iii) combine the outstanding Common Stock
into a smaller number of shares or (iv) issue any shares of its capital
stock in a reclassification of the outstanding Common Stock, the number of
Rights associated with each share of Common stock then outstanding, or
issued or delivered thereafter but prior to the Distribution Date, shall
be proportionately adjusted so that the number of Rights thereafter
associated with each share of Common Stock following any such event shall
equal the result obtained by multiplying the number of Rights associated
with each share of Common Stock immediately prior to such event (or, in
the event that any adjustment is made in connection with such event by
reason of Section 11(i), after such adjustment) by a fraction the
numerator of which shall be the total number of shares of Common Stock
outstanding immediately prior to the occurrence of the event and the
<PAGE> 2
-2-
denominator of which shall be the total number of shares of Common Stock
outstanding immediately following the occurrence of such event.
3. The first full paragraph of the text of Exhibit A is hereby amended in
its entirety to read as follows:
This certifies that __________, or registered assigns,
is the registered owner of the number of Rights set
forth above, each of which entitles the owner thereof,
subject to the terms, provisions and conditions of the
Second Amended and Restated Rights Agreement, dated as
of November 21, 1995 (the "Rights Agreement"), between
Sundstrand Corporation, a Delaware corporation (the
"Company"), and Harris Trust and Savings Bank, a
national banking association (the "Rights Agent"), to
purchase from the Company at any time after the
Distribution Date (as such term is defined in the Rights
Agreement) and prior to 5:00 P.M. (Chicago time) on May
11, 2006, at the principal office of the Rights Agent in
__________, one fully paid, non-assessable share of the
Common Stock, $.50 par value (the "Common Stock"), of
the Company, at a purchase price of $200 per share (the
"Purchase Price"), upon presentation and surrender of
this Rights Certificate with the appropriate Form of
Election to Purchase duly executed. The number of
Rights evidenced by this Rights Certificate (and the
number of shares which may be purchased upon exercise
thereof) set forth above, and the Purchase Price set
forth above, are the number and Purchase Price as of
November 21, 1995 based on the Common Stock of the
Company as constituted at such date.
4. Notwithstanding anything to the contrary contained herein, this First
Amendment shall be effective prior to the two-for-one stock split in the
form of a 100% stock distribution on the issued shares of Common Stock of
the Company as declared by the Company's Board of Directors on February
20, 1996, such that any adjustments contemplated under terms of the
Agreement as amended by this First Amendment to reflect a stock split
shall be made to reflect the said stock split declared by the Company's
Board of Directors on February 20, 1996.
<PAGE> 3
-3-
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and their respective corporate seals to be hereunto affixed and
attested as of the day and year first above written.
Attest: SUNDSTRAND CORPORATION
By:/s/ William R. Coole By:/s/ Richard M. Schilling
---------------------- ------------------------
William R. Coole Richard M. Schilling
Associate General Counsel Vice President and General
and Assistant Secretary Counsel and Secretary
Attest: HARRIS TRUST AND SAVINGS BANK
By:/s/ Edward A. Gurgul By:/s/ Wendy Ryter Gimbel
---------------------- ------------------------
Name: Edward A. Gurgul Name: W. A. Ryter
Title: Trust Officer Title: Trust Officer
<PAGE> 1
Exhibit(4)(l)
[SUNDSTRAND CORPORATION LETTERHEAD]
December 1, 1995
Securities Division
Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, NY 10017
Ladies and Gentlemen:
Reference is made to the Note Agreement (the "Agreement") dated as of October
31, 1991 between Sundstrand Corporation (the "Company") and Teachers Insurance
and Annuity Association of America ("TIAA").
The Company requests that the Agreement be amended as follows, effective
immediately:
1. The words "does not exceed" where they appear in subclause (a)(I) of
clause (iv) of paragraph 6D be changed to "exceeds".
2. The words "have not" where they appear in subclause (a)(II) of clause
(iv) of paragraph 6D be changed to "have".
3. The words "have not" where they appear in subclause (b) of clause (iv) of
paragraph 6D be changed to "have".
The Company requests that the Agreement be amended as follows, effective
January 1, 1996:
4. The date "December 31, 1991" in each place that it appears in paragraph
6A be changed to "December 31, 1996".
5. The words and number "fifty-eight percent (58%)" appearing in clause (i)
of paragraph 6C be changed to "fifty-three percent (53%)".
Please evidence your consent to this amendment to the Agreement by signing the
enclosed copy of this letter and returning it to the Company, whereupon this
amendment shall become binding on the Company and TIAA.
Very truly yours,
/s/ James F. Ricketts
James F. Ricketts
Vice President and Treasurer
Accepted and consented to as of this 11th day of December, 1995
Teachers Insurance and Annuity Association of America
By: /s/ Angela Brock-Kyle
---------------------
Title: Associate Director-Private Placements
<PAGE> 1
Exhibit (4)(n)
[THE PRUDENTIAL LETTERHEAD]
As of December 11, 1995
Sundstrand Corporation
4949 Harrison Avenue
P.O. Box 7003
Rockford, IL 61125-7003
Gentlemen:
Reference is made to:
A. The note agreement between Sundstrand Corporation (the "Company") and The
Prudential Insurance Company of America ("Prudential") dated as of January
18, 1980, as amended (the "1980 Agreement");
B. The note agreement between the Company and Prudential dated as of May 15,
1991, as amended (the "May 1991 Agreement");
C. The note agreement between the Company and Prudential dated as of
December 2, 1991, as amended (the "December 1991 Agreement'); and
D. The private shelf agreement between the Company, on the one hand, and
Prudential and the Prudential Affiliates (as defined therein) which may
become party thereto, on the other hand, dated as of December 11, 1995
(the "1995 Agreement").
Pursuant to the provisions of the 1980 Agreement, the May 1991 Agreement and
the December 1991 Agreement (herein collectively referred to as the "Earlier
Agreements"), Prudential and the Company hereby consent and agree that the
Company shall be deemed to be in compliance with or in default under (as the
case may be) paragraphs 5 and 6 of each of the Earlier Agreements only if it is
in compliance with or in default under (as the case may be) paragraphs 5 and 6
of the 1995 Agreement as the same may be amended or otherwise modified from
time to time with the written consent of Prudential.
Prudential and the Company hereby further agree that (i) termination of the
1995 Agreement shall not affect the continued application hereunder of the
referenced paragraphs thereof and (ii) upon the written request of either
Prudential or the Company, paragraphs 5 and 6 of each of the Earlier Agreements
shall be amended to restate such paragraphs in substantially the
<PAGE> 2
Sundstrand Corporation
December 11, 1995
Page Two
same form as the then existing paragraphs 5 and 6 of the 1995 Agreement.
If you are in agreement with the foregoing, please sign the form of acceptance
on the enclosed counterpart of this letter and return the same to the
undersigned, whereupon this letter shall become a binding agreement between the
Company and Prudential, modifying the Earlier Agreements in the manner and to
the extent hereinabove provided.
Very truly yours,
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By: /s/ Jeffrey Dickson
------------------------
Title: Vice President
The foregoing instrument is
hereby accepted as of the date
first above written
SUNDSTRAND CORPORATION
By: /s/ James F. Ricketts
- -------------------------
Title: Vice President and Treasurer
<PAGE> 1
EXHIBIT (11)
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Year Ended
December 31, December 31,
---------------- --------------
<S> <C> <C> <C> <C>
(Amounts in millions except per share data) 1995 1994 1995 1994
------------------------------------------- ------- ------- ------ ------
EARNINGS
Net earnings $ 36 $ 35 $ 79 $ 96
======= ======= ====== ======
- ------------------------------------------------------------------------------
SHARES (a)
Weighted-average number of common shares
outstanding 62.7 65.4 62.7 65.4
Additional shares assuming conversion
of stock options .5 .1 .5 .1
------- ------- ------ ------
Fully diluted shares 63.2 65.5 63.2 65.5
======= ======= ====== ======
- ------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER SHARE (a)
Net earnings $ .57 $ .54 $1.24 $1.46
======= ======= ====== ======
- ------------------------------------------------------------------------------
</TABLE>
(a) Amounts adjusted or restated to reflect the effects of the Company's
two-for-one stock split payable in the form of a 100 percent stock
dividend authorized by the Board of Directors on February 20, 1996.
<PAGE> 1
SUNDSTRAND 1995
CORPORATION ANNUAL
REPORT
.......................
SUNDSTRAND AEROSPACE
MILTON ROY COMPANY
THE FALK CORPORATION
SULLAIR CORPORATION
[Front Cover]
<PAGE> 2
MISSION
STATEMENT
To satisfy the needs of selected worldwide aerospace and industrial markets by
developing and manufacturing high-quality, proprietary, technology-based
components and subsystems and by achieving customer satisfaction.
To serve market segments where we can either be a market leader or have a
strategy to become one while achieving returns that reward shareholders and
employees and permit the business to grow and prosper.
CONTENTS
Financial Highlights 1
Letter to Shareholders 2
Sundstrand at a Glance 6
Aerospace Market Review 8
Industrial Market Review 16
Financial Contents 24
Management's Discussion and Analysis 25
Financial Statements 30
Board of Directors 48
Officers 49
Sundstrand Corporate Information 50
[Inside front cover]
<PAGE> 3
FINANCIAL
HIGHLIGHTS
<TABLE>
<CAPTION>
(Dollar amounts in millions except per share data) 1995 1994 Change
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales.................................. $ 1,473 $ 1,373 7%
Orders received............................ $ 1,657 $ 1,437 15%
Unfilled orders............................ $ 931 $ 747 25%
Net earnings............................... $ 79 $ 96 (18%)
Net earnings per share(a).................. $ 1.25 $ 1.46 (14%)
Dividends per share(a)..................... $ .60 $ .60 -
Year-end employment........................ 9,200 9,200 -
</TABLE>
SUNDSTRAND SALES PROFILE
[Pie Charts:]
49% Aerospace
51% Industrial
84% Commercial
16% Military (b)
60% Domestic
40% International
(a) Amounts adjusted or restated to reflect the effects of the Company's
two-for-one stock split payable in the form of a 100 percent stock
dividend authorized by the Board of Directors on February 20, 1996.
(b) Military sales include sales to U.S. government agencies.
1
<PAGE> 4
TO OUR
SHAREHOLDERS
[Bar chart:]
<TABLE>
<CAPTION>
EARNINGS PER SHARE FROM CONTINUING OPERATIONS
(dollars) 1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reported 1.23 .97 1.28 1.46 1.25
Restructuring - .31 - - .71
---- ---- ---- ---- ----
Total 1.23 1.28 1.28 1.46 1.96
==== ==== ==== ==== ====
</TABLE>
For Sundstrand, 1995 was an eventful year with the appointment of a new chief
executive officer, the disposition of two non-core product lines, and the
initiation of a project to enhance future profitability by rationalizing
Aerospace plant capacity.
The Board of Directors elected Robert H. Jenkins President and Chief
Executive Officer effective October 1, 1995. Bob brings to Sundstrand extensive
operating management experience in product development, manufacturing, and
marketing, as well as a management style compatible with Sundstrand's strategic
plan. Don O'Hare will remain Chairman of the Board until April 1997.
The disposition of the Advanced Power Technology product line from
Aerospace and the Spectronic Instruments products from our Milton Roy
subsidiary completed the business unit realignment which has been underway for
several years. We enhanced our leadership position in ram air turbines (RATs)
in 1995 with the acquisition of the RAT business of Dowty Aerospace. Sundstrand
is now a highly focused organization with a platform of products on which
future growth can be profitably based.
The substantial reductions in military budgets for new aircraft have
been felt throughout the aerospace industry. In response to reduced volume and
internal manufacturing productivity increases, Sundstrand Aerospace is closing
its Lima, Ohio, plant and transfering the work to other Sundstrand plants. We
recognize the effects of this action on our employees and the Lima community
and we are striving to reduce the impact. The transfer of work and the closure
of the Lima plant are on schedule and within budget. This decision had a major
financial impact in 1995 but will result in improvement during 1996 with the
full benefits being realized beginning in 1997.
On February 20, 1996, the Company's Board of Directors authorized a
two-for-one stock split payable as a 100 percent stock dividend to be
distributed on March 19, 1996, to shareholders of record on March 5, 1996. All
per share amounts have been adjusted or restated to reflect the split. The
Board of Directors also increased the quarterly cash dividend from $.15 per
share to $.17 per share.
While total 1995 sales of $1,473 million were 7 percent higher than in
1994, net earnings declined as a result of the restructuring to $79 million, or
$1.25 per share, compared with $96 million, or $1.46 per share, in 1994.
Excluding restructuring costs, earnings were $123 million, or $1.96 per share.
Earnings benefited from
2
<PAGE> 5
[Photo Description:]
Photo of executive officers Robert H. Jenkins, President and Chief Executive
Officer; Paul Donovan, Executive Vice President and Chief Financial Officer;
Robert J. Smuland, Executive Vice President and Chief Operating Officer,
Aerospace; Don R. O'Hare, Chairman of the Board; Patrick L. Thomas, Executive
Vice President and Chief Operating Officer, Industrial.
[Photo caption:]
(Left to right) Robert H. Jenkins, President and Chief Executive Officer; Paul
Donovan, Executive Vice President and Chief Financial Officer; Robert J.
Smuland, Executive Vice President and Chief Operating Officer, Aerospace; Don
R. O'Hare, Chairman of the Board; Patrick L. Thomas, Executive Vice President
and Chief Operating Officer, Industrial.
increased sales, a more profitable mix, and cost reduction measures implemented
in prior years. Earnings per share benefited further from the repurchase of 1
million shares of the Company's stock during the year. Since program inception,
we have repurchased more than 6 million shares of the 10 million authorized by
the Board of Directors in 1993 at a total cost of $271 million. On February 20,
1996, the Board, to reflect the stock split, doubled the remaining
authorization to approximately 8 million shares. We plan to continue to
repurchase shares on an opportunistic basis.
Operating cash flow after capital expenditures reached $134 million
despite the fact that we used $13 million for the restructuring and $20 million
to increase working capital. The working capital increase was related to higher
volumes in our Industrial businesses and our efforts to attain greater work
flow stability in our Aerospace segment. To maximize the long-term value for
shareholders, we will continue to balance our deployment of cash among internal
growth, acquisitions, share repurchases, dividends, and debt retirement. In
[Bar chart:]
<TABLE>
<CAPTION>
OPERATING CASH FLOW PER SHARE AFTER CAPITAL SPENDING
<S> <C> <C> <C> <C> <C>
(dollars) 1991 1992 1993 1994 1995
- ------------------------------------------------------------------------------------------------------------------------------
1.61 2.15 2.60 .86 2.14
</TABLE>
3
<PAGE> 6
[Bar charts:]
<TABLE>
<CAPTION>
SHARES OUTSTANDING AT YEAR END
(millions) 1991 1992 1993 1994 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
36.1 36.1 33.5 31.6 30.8
<CAPTION>
OPERATING PROFIT AS A PERCENT OF SALES
Excluding restructuring charges
(percent) 1991 1992 1993 1994 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aerospace 15.9 10.8 14.1 12.4 14.9
Industrial 12.1 12.8 13.4 16.0 17.5
</TABLE>
1995, we invested $66 million in research and development, and $62 million in
capital projects. We applied $60 million to share repurchases, and another $38
million to dividend payments. During the year we reduced our debt by $45 million
and maintained a debt ratio in our optimal mid-40 percent range. We did not
make any major acquisitions in 1995.
We are pleased that most of our markets now are in or entering the
upward portions of their cycles and are expected to continue improving in 1996.
Incoming orders of $1,657 million were up by 15 percent compared with 1994
orders and were 12 percent higher than 1995 sales.
In our Aerospace segment, total sales of $726 million were up by $16
million from 1994. Commercial sales of $487 million were up by 13 percent,
while military sales of $239 million were down by 14 percent. The increase in
the commercial business was driven by a 25 percent increase in aftermarket
sales, which reflected the sustained growth in passenger traffic and previously
depleted spare parts inventories. Total Aerospace incoming orders increased to
$896 million in 1995, which included a $172 million contract for Spearfish
torpedo propulsion units. Because of the improvements in sales and orders, and
particularly because of new customer-funded development work, a planned
reduction in engineering staff was averted in the third quarter. Improved
manufacturing efficiency and the favorable mix of incremental sales resulted in
a solid recovery in operating profit margins, from 12.4 percent of sales in
1994 to 14.9 percent in 1995, excluding restructuring costs.
Results in all three of our Industrial businesses in 1995 reflected
the continued growth of these cyclical businesses through the market upcycle.
Industrial sales increased by 13 percent to $747 million. Incoming orders of
$761 million were up by 9 percent from 1994. As a result of cost reductions in
past years and continued strong market positions, operating profit as a
percentage of sales increased from 16.0 percent in 1994 to 17.5 percent in
1995, excluding restructuring costs.
For 1996, our expectations for the Aerospace segment include improving
sales, orders, and operating profit, reflecting the initial benefits of our
capacity rationalization and the cyclical improvement in the commercial
aerospace markets. In our Industrial businesses we expect further growth in
sales and profits in 1996
4
<PAGE> 7
through sustained momentum in our existing markets and continued international
expansion. As we look toward the end of the decade and beyond, we anticipate
continued growth in our Industrial segment markets, improving conditions in
commercial aerospace markets, and soft but stabilized military markets. We are
optimistic about our future and we expect to return to our historic level of
profitability.
In January 1996, Berger G. "Bud" Wallin, Executive Vice President for
Special Projects, announced his retirement effective April 1, 1996. During his
41 years with Sundstrand, Bud became a driving force in the successful
development of our Industrial segment. The Company will continue to benefit
from his many contributions for years to come and from his continued input as a
director.
We also would like to acknowledge the contributions of Thomas G.
Pownall, retired Chairman of Martin Marietta Corporation, who will retire as a
director upon the expiration of his term at the 1996 Annual Meeting of
Stockholders. Mr. Pownall has served as a director since 1978, and will become
a Director Emeritus of the Company.
We thank our shareholders, employees, customers, and suppliers for
their continued support.
February 20, 1996
/s/ Don R. O'Hare /s/ Robert H. Jenkins
- ----------------------------------- ----------------------------------
Don R. O'Hare Robert H. Jenkins
Chairman of the Board President and
Chief Executive Officer
/s/ Paul Donovan /s/ Robert J. Smuland
- ----------------------------------- ----------------------------------
Paul Donovan Robert J. Smuland
Executive Vice President and Executive Vice President and
Chief Financial Officer Chief Operating Officer, Aerospace
/s/ Patrick L. Thomas
- -----------------------------------
Patrick L. Thomas
Executive Vice President and
Chief Operating Officer, Industrial
[Photo description:]
Berger G. Wallin, Executive Vice President for Special Projects.
[Photo caption:]
None.
Berger G. Wallin
CAREER HIGHLIGHTS
1955
Earned B.S. degree in Civil
Engineering from Purdue University.
Joined Sundstrand.
1966-1972
Plant Manager of Sundstrand
Aviation in Denver.
1972-1978
General Manager of Sundstrand
Fluid Handling in Arvada, Colorado.
1978-1989
Vice President and General Manager
of Sundstrand Fluid Handling.
1989-1990
Group Vice President, Industrial.
1990-1995
Executive Vice President and Chief
Operating Officer, Industrial.
1995-1996
Executive Vice President for Special
Projects.
5
<PAGE> 8
SUNDSTRAND AT A GLANCE
AEROSPACE
PRODUCT LINES
Electric Power Systems
Electric power generating systems,
including integrated drive generators,
constant speed drives, generators,
and controls
MECHANICAL AND FLUID SYSTEMS
Pumping, actuation, emergency
power, torpedo propulsion, and
secondary power systems
POWER SYSTEMS
Auxiliary power units, gas turbine
engines, fans, and environmental
control systems
<TABLE>
<CAPTION>
SALES
- --------------------------------------------------------------------------------------------------------------
(millions) 1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial OEM $ 271 $ 264 $ 204 $ 205 $ 203
Commercial Aftermarket 218 253 230 227 284
Military OEM 239 232 227 200 167
Military Aftermarket 80 91 93 78 72
- --------------------------------------------------------------------------------------------------------------
Total Aerospace $ 808 $ 840 $ 754 $ 710 $ 726
==============================================================================================================
</TABLE>
[pie chart:]
1995 PRIMARY MARKETS
Commercial OEM 28%
Commercial Aftermarket 39%
Military OEM 23%
Military Aftermarket 10%
[bar charts:]
OPERATING PERFORMANCE
<TABLE>
NET SALES
(millions of dollars) 1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial 489 517 434 432 487
Military 319 323 319 278 239
- --------------------------------------------------------------------------------------------------------------
Total Aerospace 808 840 754 710 726
==============================================================================================================
<CAPTION>
OPERATING PROFIT
(millions of dollars) 1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reported 128 90 106 88 54
Restructuring - 35 - - 54
- --------------------------------------------------------------------------------------------------------------
Total 128 125 106 88 108
==============================================================================================================
<CAPTION>
ORDERS RECEIVED
(millions of dollars) 1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
686 886 527 736 896
<CAPTION>
UNFILLED ORDERS
(millions of dollars) 1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
753 799 572 599 769
</TABLE>
6
<PAGE> 9
INDUSTRIAL
BUSINESSES
MILTON ROY COMPANY
Process pumps, metering pumps,
and specialty pumps
THE FALK CORPORATION
Mechanical power transmissions,
couplings, stationary fluid power
drives, and marine drives
SULLAIR CORPORATION
Rotary screw air and gas
compressors, pneumatic tools,
dryers, and filters
<TABLE>
<CAPTION>
SALES
- ------------------------------------------------------------------------------------------------------------
(millions) 1991 1992 1993 1994 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Milton Roy $ 238 $ 248 $ 240 $ 252 $ 269
Falk 209 192 196 205 238
Sullair 199 199 193 206 240
- ------------------------------------------------------------------------------------------------------------
Total Industrial $ 646 $ 639 $ 629 $ 663 $ 747
============================================================================================================
</TABLE>
[pie chart:]
1995 PRIMARY MARKETS
Construction & Cement 14%
Mining & Metals 10%
Agribusiness 3%
Chemical 14%
Transportation 3%
General Industry 16%
Wood & Paper 8%
Consumer 1%
Hydrocarbon 15%
Water/Waste Treatment 6%
Other 9%
[bar charts:]
OPERATING PERFORMANCE
<TABLE>
<CAPTION>
NET SALES
(millions of dollars) 1991 1992 1993 1994 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Milton Roy 238 248 240 252 269
Falk 209 192 196 205 238
Sullair 199 199 193 206 240
- ----------------------------------------------------------------------------------------------------------
Total Industrial 646 639 629 663 747
==========================================================================================================
<CAPTION>
OPERATING PROFIT
(millions of dollars) 1991 1992 1993 1994 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reported 78 82 84 106 121
Restructuring - - - - 10
- ----------------------------------------------------------------------------------------------------------
Total 78 82 84 106 131
==========================================================================================================
<CAPTION>
ORDERS RECEIVED
(millions of dollars) 1991 1992 1993 1994 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
626 642 625 701 761
<CAPTION>
UNFILLED ORDERS
(millions of dollars) 1991 1992 1993 1994 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
113 115 110 148 162
</TABLE>
7
<PAGE> 10
AEROSPACE
MARKET
REVIEW
In 1995, the commercial aerospace market reached what is believed to be the
bottom of a business cycle that is reshaping the industry. Revenue passenger
miles have resumed a pattern of steady growth, and air cargo demand has been
climbing even faster. Orders for new large commercial transport aircraft from
the three major manufacturers increased to approximately 600 in 1995 compared
with a low of about 300 in 1994. Orders and deliveries are expected to increase
in 1996 as the cyclical recovery continues.
In the emerging market for smaller regional aircraft, deliveries have
been increasing since 1994 as more platforms enter service and as airlines
shift toward direct routing and more frequent flights. Business jets also are
enjoying a resurgence paralleling the economic upturn and improvements in
corporate profitability.
Future growth in air traffic will follow demographic, economic, and
industrialization patterns. The North American and European markets are mature,
and will continue to expand methodically from their large existing bases. In
Latin America, Eastern Europe, and particularly in the Asia-Pacific region,
growth will be much faster, though from smaller bases, as infrastructure is
developed and routes are expanded to serve the increasing demand in the world's
growing economies. The large underserved populations in these areas should
generate strong growth through the next decade.
Military procurement continued to decline in 1995, although the rate
of decline is slowing. The end of the Cold War and intense efforts to balance
the U.S. budget triggered a massive reduction in defense spending that is now
starting to stabilize, but at a much reduced level. Economic incentives to
improve the balance of trade are overcoming political barriers to foreign
military sales for the United States. As a result, international deliveries of
U.S. military aircraft will grow in the short term until unmet demand is
satisfied. While the total military market represents a smaller portion of the
aerospace industry, it will remain an important arena for technological
development and will provide a sound business base.
The successful suppliers to tomorrow's worldwide aerospace industry
will be those capable of assuming a greater responsibility for total system
development and procurement. It will also be those who have reduced costs to
remain competitive in the smaller and more price-conscious marketplace.
Sundstrand Aerospace is actively participating in these market changes by
enhancing our technical capability to develop and provide complete systems and
by partnering with those who can provide complementary skills.
Aggressive restructuring activities have lowered fixed costs
substantially and employees have taken ownership in the effort to reduce the
cost of business, especially in our manufacturing processes. A shift to
self-directed work teams, cellular manufacturing, and demand flow assembly
operations allows employees to produce more with higher levels of quality.
Increasingly challenging customer requirements are met with quality
enhancements and integrated engineering practices. Without sacrificing
profitability, we are making significant progress in increasing productivity to
deliver better value to customers through lower costs, better quality, and
improved service.
8
<PAGE> 11
[Large photo description:]
Tails of Boeing 777 aircraft showing varied airline logos.
[Caption:]
The Boeing 777 completed its first full year of production in 1995. The
reliability of Sundstrand's main and backup electric power generating systems
was among the critical elements in Boeing's successful bid for an early
approval allowing even the first production aircraft to fly transoceanic
routes.
[Small photo:]
Artist's rendering of McDonnell Douglas MD-95 in flight.
[Caption:]
The trend toward supplying complete systems reached a new level for Sundstrand
in 1995 with the program launch of the 100-120 passenger McDonnell Douglas
MD-95. Sundstrand will design and supply the entire aircraft AC electric power
generating and distribution systems. Sundstrand and Labinal, through their
APIC joint venture, will also supply the auxiliary power system for the MD-95.
9
<PAGE> 12
[Large photo:]
Airline mechanic inspecting integrated drive generator inside engine cowling of
Southwest Airlines 737 aircraft.
[Caption:]
Southwest Airlines is known throughout the commercial aerospace industry for
its operating efficiency, on-time performance, and high ratings in customer
satisfaction. To help Southwest maintain its reputation, Sundstrand was
selected in 1995 to perform all electric power generating system overhaul and
repair work for the airline's all-737 fleet.
[Small photo:]
Airline mechanic standing at tool chest in front of China XinHua 737 aircraft
with open engine cowling.
[Caption:]
In addition to direct participation in emerging markets, Sundstrand is
expanding its international reach through its OEM customers. Like most
commercial aircraft delivered to airlines worldwide, this Boeing 737, shown
with a China XinHua Airlines mechanic during a routine maintenance inspection,
uses Sundstrand electric power generating equipment. China XinHua also has
selected the APIC APS 2000 auxilary power unit.
10
<PAGE> 13
AEROSPACE
ELECTRIC
POWER
SYSTEMS
As the leading supplier of aircraft electric power systems, Sundstrand draws on
an unmatched breadth of experience and depth of product offerings. Sundstrand
systems fly on every commercial aircraft platform offered by Boeing, Airbus
Industrie, and McDonnell Douglas except the MD-90, several of the most popular
smaller commercial aircraft, and many of the world's military aircraft. With
proven capabilities in hydromechanical, power electronics, high-voltage DC, and
hybrid technologies, Sundstrand can design the best system for each aircraft's
power requirements and usage patterns. This scope of coverage is important both
for the significant aftermarket business it generates and for the ongoing
relationships it provides with customers.
The 1995 highlights of Sundstrand's commercial aerospace business
included the first commercial flight of the Boeing 777 and the launch of the
McDonnell Douglas MD-95 program. Both aircraft use Sundstrand electric power
systems, and both represent a shift toward complete system responsibility. The
777 generated sales for Sundstrand as airlines began taking delivery of the
aircraft and purchased spare end items as well as replacement parts to maintain
their fleets. The MD-95 is expected to move through the same cycle later in the
decade as it moves from development into its production and delivery phases.
Regional aircraft, a dynamic new market segment, gained momentum in
1995, driving growing demand for Sundstrand electric power systems. The
high-end business jet market also represents a growth opportunity for
Sundstrand, with its selection as a system supplier on the Canadair CL-604 and
the Gulfstream V.
Progress continued during the year on a number of military programs
using Sundstrand systems. Milestones included the first delivery of hardware
for the 767 AWACS aircraft, the rollout of the RAH-66 Comanche helicopter, and
the critical design review for the F-22 Advanced Tactical Fighter. The V-22
tilt rotor aircraft and C-17 military transport had successful flight testing
and demonstration flights, and flight testing continued for the Eurofighter
2000. Sundstrand was awarded a contract in 1995 to provide the initial
production-configuration electric power generating systems on the Eurofighter
2000 next-generation European fighter aircraft.
As part of an ongoing process of matching the organization to the
available work, Sundstrand decided in early 1995 to close its facility in Lima,
Ohio. The transition of work to other facilities is nearing completion, and the
plant will be vacated on schedule during 1996.
During 1995, Sundstrand sold a majority interest in its Advanced Power
Technology (APT) subsidiary to the APT management team. APT manufactures
high-power semiconductors which are used in our more advanced electric power
conversion systems. Although APT is an important supplier, its business was not
considered a core product line.
The Company will regularly evaluate and adjust its operations and
processes to continue to provide its customers with unparalleled quality and
service in aircraft electric power. Continuous refinement of existing products
and development of new technologies will protect and extend Sundstrand's
leadership position in this premier product line.
11
<PAGE> 14
AEROSPACE
MECHANICAL
AND FLUID
SYSTEMS
Sundstrand has developed a strong market presence in aircraft actuation,
secondary/emergency power, and fluid pumping systems as well as systems for
missile and space applications and undersea propulsion.
Actuation systems incorporate mechanical, hydraulic, and electrical
technologies for the movement and positioning of aircraft control surfaces such
as flaps and slats. Recent applications include systems for the Gulfstream V
and Canadair Global Express executive jets.
Secondary and emergency power systems include aircraft accessory
drives and engine starting systems along with ram air turbines (RATs) and
air-driven generators (ADGs) that provide emergency hydraulic or electric
power. The acquisition in 1995 of the Dowty Aerospace RAT business enhanced
Sundstrand's leadership position in this field. Current secondary power
programs include the F-16 engine start system, the B-2 aircraft-mounted
accessory drive (AMAD) gearbox, and the gearboxes for auxiliary power units
(APUs) marketed by Sundstrand Power Systems and the APIC joint venture.
Sundstrand was selected in 1995 to produce the accessory drive gearbox on the
PW4000 series engine. This contract will allow Sundstrand to deliver a complete
accessory system ready for installation, including gearbox-mounted electric
power equipment for those aircraft using Sundstrand systems. A development
contract for the Northrop Grumman F/A-18 E/F aircraft AMAD gearbox was awarded
to Sundstrand in 1995.
In fluid systems, Sundstrand is building on its solid base of current
business. We continue to expand our "family" of fuel pumps which allows easy
adaptation to a variety of applications with low development costs. Successful
main fuel pump programs for commercial turbofan engines have contributed to
Sundstrand's selection as a supplier on newer engines. New pump technology is
being developed for military applications such as the F/A-18E/F aircraft, the
F-22 Advanced Tactical Fighter, and the Joint Advanced Strike Technology
aircraft. Sundstrand also provides turbine engine lube and scavenge pumps and a
number of airframe-mounted fuel delivery and management pumps for both
commercial and military applications.
In 1995, Sundstrand was selected to supply the turbine propulsion
unit for the British Royal Navy's Spearfish torpedo. This and other foreign
military programs are expected to increase sales over the next few years.
Throughout its mechanical and fluid systems business, Sundstrand is
constantly extending its technology to further its competitive position,
whether through selection as a supplier on new applications or as a replacement
supplier on existing platforms.
12
<PAGE> 15
[Large photo:]
Engineer with propulsion unit in front of Spearfish torpedo with second
propulsion unit on crane ready for installation.
[Caption:]
Extreme operating conditions, compact size, long shelf life, and
unfailing reliability are among the many challenges in torpedo design. The
Spearfish torpedo, powered by a Sundstrand open cycle gas turbine
powerplant (suspended in housing in the background and exposed in the
foreground), relies on an innovative engineering and teaming effort among the
British Royal Navy, prime contractor Marconi, and Sundstrand, to set new
standards in performance and reliability.
[Small photo:]
Technician overseeing machining of housing for F-16 engine start system
gearbox.
[Caption:]
While the U.S. military market has been declining steadily over the past
several years, foreign military markets are generating a growing demand for
American technology. In producing the engine start system/accessory drive
gearbox for the General Dynamics F-16 fighter aircraft, Sundstrand performs
complex, high-precision machining to exacting specifications on steel-lined
magnesium castings.
13
<PAGE> 16
[Large photo:]
Mechanic inspecting APS 3200 auxiliary power unit installed in Lufthansa German
Airlines A321 aircraft.
[Caption]
Through the APIC joint venture with Labinal, Sundstrand serves the large
commercial aerospace market with its expanding line of APUs. The largest unit
currently offered by APIC is the APS 3200 APU, shown here in a Lufthansa German
Airlines Airbus A321 and now in service through new installations and retrofits
on the entire Airbus A320 aircraft series.
[Small photo]
EMB 145 aircraft in flight.
[Caption]
Representing the small end of Sundstrand's commercial APU product line, the APS
500 is designed for small commuter aircraft such as the Embraer 145 turbofan,
which completed its first flight in 1995. Standardized products, advanced
materials, and efficient design allow enhanced performance and competitive
pricing.
14
<PAGE> 17
AEROSPACE
POWER
SYSTEMS
Sundstrand produces auxiliary power units (APUs) for a wide variety of
commercial and military applications ranging from business jets to large
commercial transports. Auxiliary Power International Corporation (APIC), a
joint venture between Sundstrand and Labinal S.A. of France, markets APUs for
Airbus, Boeing, and McDonnell Douglas commercial transports. Sundstrand markets
its own APUs directly for smaller commercial applications and all military
applications.
APIC serves the large commercial market with the APS 2000 APU for the
Boeing 737 and the APS 3200 APU for the Airbus A319, A320, and A321. Additional
volume will be generated in coming years as an APS 2000 series APU enters
service on the MD-95.
For the smaller commercial Sundstrand APUs, 1995 marked first flights
on both the Embraer 145 turbofan, using the APS 500 APU, and the IPTN N250
turboprop, using the APS 1000 APU. Production quantities of the APS 1000 APU
entered service in the growing worldwide regional aircraft market on the AVRO
regional jets, the Saab 2000 Jetprop, and the Fokker 50 turboprop.
Sundstrand's military auxiliary power applications include the APUs on
the V-22 tilt rotor aircraft, F-16 engine start system, KC-135R tanker, and
CH-53 and Blackhawk helicopters. A range of APU sizes for applications through
200-passenger aircraft will be supplemented by small gas turbine engines,
fans, compressors, and vapor cycle cooling systems.
High performance fans have become increasingly successful for
Sundstrand with program wins on aircraft including the Canadair Global Express
executive jet, Boeing 757 and 777, McDonnell Douglas MD-11, MD-90, and MD-95,
and the Airbus A319/A320/A321 family. Outstanding reliability is an
acknowledged characteristic of Sundstrand fans.
The future of Sundstrand's Power Systems business will be built on the
expanding family of products and growing number of aircraft on which they have
been selected. The growing acceptance by airlines worldwide is establishing a
base of installed units that is demonstrating the products' reliability. Our
family of products is beginning to generate growing aftermarket sales.
15
<PAGE> 18
INDUSTRIAL
MARKET
REVIEW
The Company's Industrial businesses serve a diverse group of basic industries
throughout the world with a wide variety of products ranging from small
metering pumps to some of the world's largest ring gears. The business cycles
of these industries, which are involved primarily in raw material processing,
bulk material handling, direct manufacturing, and construction, are tied
closely to the level of general economic activity. In 1995, markets worldwide
generally continued to improve, although the pace varied by geographic region
and by industry.
In North America, the economy grew at a moderate pace throughout the
year, which fueled long-awaited industrial refurbishment and expansion
projects. Europe's economy continued to improve during the year, although
Germany's growth was restricted by high interest rates and the strong mark. The
Far East and Asia continued to lead the world's markets in rapid growth, with
particular strength in India and the emerging sectors of the Pacific Rim. The
Asia-Pacific region's large population base and unceasing drive for
industrialization should continue to make it the world's strongest growth
market well into the next decade.
Stable oil prices supported expansion in hydrocarbon processing
markets worldwide, and certain niche products generated increasing capital
project activity. Some sectors of chemical processing showed improvement as
well, driven by increasing industrial demand and the positive effects of
previous chemical company restructurings. The global cement and construction
industry gained momentum during the year, with shortages reported in some
emerging markets. Continued infrastructure development in these markets
contributed to demand for primary metals, especially copper, which generated
strong mining activity throughout 1995. The pulp and paper industry expanded as
a result of strong demand, which drove near-capacity paper production levels
through much of the year.
To augment the sales growth generated by worldwide economic expansion,
the Company's Industrial businesses are aggressively pursuing new business in
targeted markets. In support of international expansion, all Industrial segment
manufacturing locations have achieved ISO 9001 certification. Internal product
developments target better performance at lower cost. Superior service to all
customers, direct and through distribution networks, is a focal point for all
of Sundstrand's Industrial businesses.
16
<PAGE> 19
[Photo:]
Technician inspecting pump in chemical processing facility.
[Caption:]
Sundstrand supplies the chemical processing industry with a number of
Industrial products, including the large Milton Roy HMP 3000 high-pressure
process pumps shown in an Amoco production facility.
17
<PAGE> 20
[Large photo:]
Worker checking shipment of multi-colored dosing pumps.
[Caption:]
A shipment of Milroyal(R) dosing pumps at Dosapro Milton Roy in Europe features
customer-specified color coding to help isolate processes in a complex
chemical production facility. Custom configurations of standard designs
provide responsiveness to specific customer needs without compromising
production efficiencies.
[Small photo:]
Worker with Kontro sealless pump and boxed hardware packed for shipping.
[Caption:]
Following the 1994 acquisition of HMD-Kontro, Milton Roy integrated the U.S.
operations into its Fluid Handling facility in Colorado. The acquired
magnetically driven sealless pump line now has common manufacturing, marketing,
and distribution with the existing line of sealless canned motor pumps.
18
<PAGE> 21
INDUSTRIAL
PUMPS
The Milton Roy Company serves the worldwide market with high-quality metering
pumps, centrifugal process pumps and compressors, and specialty pumps.
Metering pumps typically are used in municipal and industrial water
conditioning, waste water treatment, chemical processing, and pulp and paper
applications. The larger motor-driven metering pumps are often designed into
systems and sold through engineering contractors. Smaller electronic metering
pumps, controllers, and pH monitoring systems are stock items sold through
industrial distribution channels for small industrial water treatment
applications.
In 1995, market activity increased in most geographic areas in concert
with the general economic recovery, although the emerging economies of the Far
East and Eastern Europe are expanding more rapidly than the more mature markets
in the United States and Europe. To serve this growing demand, Milton Roy is
adding sales and service support in many regions.
In 1995, Milton Roy increased its ownership in Asia LMI Pte. Ltd., a
pump manufacturer in India, to 70 percent. Majority ownership provides a
platform for expansion in this large and growing market. Also during 1995,
Milton Roy sold its Spectronic Instruments product lines, which were not
considered a core business for Sundstrand. Milton Roy is improving its
competitive position by unifying the engineering, manufacture, and distribution
of its historically diverse product lines. A new line of metering pumps that
will be introduced in 1996 has been designed as a simple, low-cost, reliable
product to be manufactured and distributed competitively on a global basis to
serve the world's water conditioning needs.
The Fluid Handling division manufactures engineered pumps,
compressors, and blowers for the hydrocarbon and chemical processing, pulp and
paper, water treatment, electric power, and sanitary processing industries
worldwide. These pumps are tailored for specific customer applications, and are
sold to end users and engineering contractors. HMD-Kontro, acquired in 1994,
has been integrated into the Fluid Handling operations and is contributing to
the division's international sales.
Areas of particular strength in 1995 were the pulp and paper industry
and the hydrocarbon processing industry, which are both running at
near-capacity levels in many served applications. Domestic growth in the
hydrocarbon processing industry is being slowed by increasing environmental
concerns. New plant construction and capacity expansion in the developing
regions of the world provided significant opportunities for Fluid Handling in
1995. Internally, Fluid Handling continues to improve its processes to provide
the highest quality products and service in the industry, while reducing cycle
times and production costs.
19
<PAGE> 22
INDUSTRIAL
MECHANICAL
POWER
TRANSMISSION
EQUIPMENT
From its U.S. manufacturing operations, The Falk Corporation serves a global
customer base in industries such as mining, metal processing, wood and paper
processing, construction and cement, chemical processing, utilities,
transportation, food processing, and a variety of smaller markets. Falk's
products include a broad line of standard enclosed gear drives and flexible
shaft couplings sold through a worldwide distributor network as well as
custom-engineered enclosed gear drives, large open gear sets, large
alloyed-steel castings, and main propulsion marine drives sold directly to
original equipment manufacturers and end users.
As a vertically integrated company, Falk assesses customer needs,
engineers appropriate solutions, pours high-quality alloyed-steel castings to
exacting specifications, manufactures most of its own components, and assembles
them into finished products. In addition to providing superior quality and cost
control, manufacturing flexibility and short cycle times permit short standard
product lead times, as well as rapid turnaround on priority projects.
Typical customer applications involve bulk material handling and raw
material processing into finished goods. Falk's standard enclosed gear drives
and couplings are used in conveying and processing applications, while the
larger custom drives are used for ore grinding and marine propulsion systems.
The strongest markets in 1995 continued to be mining and mineral production,
cement, and pulp and paper. These industries reflected strong economic growth
and increasing demand, particularly in South America and the Far East. In Latin
America, Falk increased its sales efforts in the Caribbean countries and Chile
to serve these growing markets better. To increase its penetration in the
Asia/Pacific region, Falk increased its sales and marketing efforts and
continues to pursue joint venture opportunities.
With facilities in the United States and joint ventures in Mexico and
Brazil, Falk serves well established markets in North and South America. Plant
modernization activities include a conversion to cellular manufacturing at
operations in both Milwaukee, Wisconsin, and Auburn, Alabama. The Auburn plant
features new machining cells with robotics that are designed for high-volume
production of standard couplings. A major expansion of the Auburn plant began
in 1995 to provide additional capacity for production of these high-demand
standard products. At Falk's Milwaukee facility, a new carburizing furnace and
pollution-free quench tank saw their first full year of service in 1995. The
furnace eliminates outsourcing of this critical operation, reducing production
cycle time and maintaining Falk's stringent internal quality controls.
Products introduced in 1995 include a new alignment-free drive and a
new line of non-lubricated disc couplings. Both products are designed to reduce
installation and maintenance costs for the end user.
In addition to the plant improvements and new product developments,
Falk is continuing to expand and upgrade its comprehensive product line to meet
global customers' needs, improve operating performance, and reduce costs, which
should enable it to increase its market share in the power transmission
industry.
An unceasing quest for improvement drives the regular redesign of Sullair
products. The encapsulated compressor assembly lines ran multiple shifts
through much of 1995 to meet the market demand for the latest generation of
these compact packaged units used in a wide variety of light industrial
applications.
Sullair's large industrial compressors are developing a strong following in the
U.S. textile industry based on their consistent performance and continuous-duty
reliability. The Sara Lee Knit Products (Hanes) plant in Jefferson, North
Carolina, uses two large compressors with filters and dryers to power its
air-operated equipment.
20
<PAGE> 23
[Large photo:]
Field service representative with maintenance crew preparing to remove large
pinion gear in cement mill.
[Caption:]
After more than 20 years of service, a Falk pinion gear is prepared for
replacement in a ball mill drive application at Lone Star Cement in Cape
Girardeau, Missouri. Falk technical support is on hand to assist the Lone Star
work crew to assure a trouble-free installation and minimize down time. Product
reliability and customer service are key components of the Falk reputation.
[Small photo:]
Pinion gear immediately after removal from carburizing furnace.
[Caption:]
At a critical point in the heat treating process at the Milwaukee, Wisconsin,
plant, a pinion shaft is removed from Falk's new carburizing furnace and
transferred to the pollution-free quench tank. Strong vertical integration
throughout Falk's production processes provides consistent quality
control and reduced manufacturing cycle times.
21
<PAGE> 24
[Large photo]
Assembly line with encapsulated compressors in various stages of completion.
[Caption]
An unceasing quest for improvement drives the regular redesign of Sullair
products. The encapsulated compressor assembly lines ran multiple shifts
through much of 1995 to meet the market demand for the latest
generation of these compact packaged units used in a wide variety of light
industrial applications.
[Small photo]
Worker with large industrial compressor and variety of Hanes products.
[Caption]
Sullair's large industrial compressors are developing a strong following in the
U.S. textile industry based on their consistent performance and continuous-duty
reliability. The Sara Lee Knit Products (Hanes) plant in Jefferson, North
Carolina, uses two large compressors with filters and dryers to power its air-
operated equipment.
22
<PAGE> 25
INDUSTRIAL
STATIONARY
AND PORTABLE
COMPRESSORS
Sullair Corporation is a major multinational manufacturer of rotary screw
industrial and portable air compressors, rotary screw compressors for the
refrigeration market, rotary screw vacuum systems, and pneumatic construction
tools. Filters and dryers are also available for applications requiring
extremely clean, dry air. Sullair's industrial compressors range from
five-horsepower continuous-duty encapsulated models to 600-horsepower,
high-efficiency, two-stage tandem models. Sullair's portable compressors for
the construction market range from 70 cfm to 1,600 cfm. With manufacturing
operations in the United States and France, joint-venture facilities in
Argentina and China, and a licensee serving Australia and New Zealand, Sullair
meets the needs of industrial and construction markets around the world.
Sullair continued its program to expand its encapsulated compressor
line in 1995 to meet the growing demands of its global customers. These
packaged systems are gaining popularity in a variety of commercial and light
industrial applications. Also in 1995, Sullair introduced training programs in
China for both distributors and end users, utilizing the highly effective model
of aftermarket support developed in the United States and successfully
implemented in Europe. The name recognition fostered by these programs has
helped to establish Sullair in its growth markets, while standardization of
products and manufacturing methods have enhanced its globalization efforts. A
consistent image and an expanding worldwide distributor network are providing a
strong base for continued growth into the next decade.
In 1995, Sullair continued to grow in the Middle Eastern and certain
European markets, particularly France and England. North America generated
moderate growth for the year, consistent with economic activity. Portable
compressor sales reflected improved construction market conditions compared
with 1994. The textile industry generated the strongest demand for large
industrial compressor installations, while oil-free compressors gained
acceptance in pharmaceuticals and food processing applications. The brightest
spot for both construction and industrial compressors was Asia, where
consistent economic growth, the favorable exchange rates, and aggressive
marketing efforts combined to produce solid increases.
Through joint ventures, licensing arrangements, and sales offices,
Sullair is successfully penetrating new markets and establishing a worldwide
system for regional manufacturing and distribution. Sullair expects to
strengthen its position in rotary screw compressors by pursuing opportunities
in the expanding economic regions of the world, exploring niche markets with
potential global applications, and continuing to develop new products.
23
<PAGE> 26
FINANCIAL CONTENTS
Management's Discussion and Analysis 25
Consolidated Statement of Earnings 30
Consolidated Statement of Cash Flows 31
Consolidated Balance Sheet 32
Consolidated Statement of Shareholders' Equity 33
Information by Business Segment 34
Quarterly Results 35
Notes to Consolidated Financial Statements 36
Management's Report 45
Independent Auditor's Report 45
Additional 1O-K Information 46
Selected Financial Data 47
24
<PAGE> 27
Management's Discussion and Analysis
<TABLE>
<CAPTION>
Sales (amounts in millions) and 1995 1994 1993
--------------------------------------------------------------------------
increase (decrease) from prior year Amount Change Amount Change Amount Change
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Business segment
Aerospace - Commercial............................... $ 487 12.7% $ 432 (0.5%) $ 434 (16.0%)
- Military................................. 239 (14.0%) 278 (13.1%) 320 (1.0%)
- ------------------------------------------------------------------------------------------------------------------------------------
- Total.................................... 726 2.3% 710 (5.9%) 754 (10.2%)
Industrial........................................... 747 12.7% 663 5.4% 629 (1.6%)
- ------------------------------------------------------------------------------------------------------------------------------------
Total............................................. $ 1,473 7.3% $ 1,373 (0.8%) $ 1,383 (6.5%)
====================================================================================================================================
</TABLE>
[Bar chart:]
<TABLE>
<CAPTION>
Sales
(millions of dollars) 1991 1992 1993 1994 1995
- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aerospace 808 840 754 710 726
Industrial 646 639 629 663 747
- ----------------------------------------------------------------
Total 1,454 1,479 1,383 1,373 1,473
</TABLE>
The letter to shareholders on pages two through five of this report and the
following discussion contain forward-looking statements which are based on
assumptions such as the timing, volume, and pricing of customer orders. These
assumptions are based on a variety of factors, including estimates of revenue
passenger miles, projections of aircraft deliveries, anticipated levels of
defense spending, projections of capital spending in a variety of industrial
markets, and industry-specific economic outlooks. These forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those outlined in the forward-looking
statements, including the risk of cancellation or adjustment of large aircraft
orders, termination of significant government programs (particularly military
procurement programs serviced by the Company), decreased demand in markets
served by our customers (particularly commercial airline traffic), or
lower-than-anticipated penetration of foreign markets.
Total Company sales increased $100 million to $1,473 million in 1995, from
$1,373 million in 1994. Net earnings in 1995 were $79 million, or $1.25 per
share, which included a pretax restructuring charge of $58 million. Excluding
this restructuring charge and the related period costs, 1995 net earnings were
$123 million, or $1.96 per share, compared with $96 million, or $1.46 per
share, in 1994.
SALES BY BUSINESS SEGMENT
Aerospace segment sales in 1995 were $726 million, which represents a $16
million increase over 1994 sales and 49.3 percent of total Company sales.
Commercial sales in 1995 increased by $55 million compared with 1994 due to a
25.1 percent increase in aftermarket sales. The growth in commercial
aftermarket sales reflected the sustained growth in passenger traffic and
previously depleted spare parts inventories. Commercial original equipment
manufacturer (OEM) sales were flat in 1995 compared with 1994. As a result of a
more than 15 percent decrease in military OEM sales and a more than 5 percent
decrease in military aftermarket sales, military sales in 1995 were $239
million, a $39 million decrease from 1994.
Aerospace segment sales in 1994 declined $44 million from 1993 to $710
million, representing 51.7 percent of total Company sales. Military sales were
$42 million lower in 1994 than in 1993 with sales to both military OEM and
aftermarket customers declining by more than 10 percent. Both commercial OEM
and aftermarket sales were flat in 1994 compared with 1993.
The Company's electric power systems product line (Electric Power) is the
largest product line within the Aerospace segment. This product line accounted
for 63.6 percent, 62.1 percent, and 59.6 percent of Aerospace segment sales in
1995, 1994, and 1993, respectively. In addition, Electric Power contributed
significantly to the profits of the Aerospace segment.
Industrial segment sales were $747 million in 1995, representing 50.7
percent of total Company sales, compared with 1994 sales of $663 million.
Excluding sales from Milton Roy's divested Spectronic Instruments (Spectronic)
business, sales at all three Industrial businesses increased by approximately
15 percent,. The sales increases resulted primarily from an upturn in the
cyclical markets which the Industrial businesses serve.
Industrial segment sales increased by $34 million from $629 million in
1993 to $663 million in 1994, representing 48.3 percent of total Company sales.
The increase was a result of improved sales from each of the three Industrial
businesses. The improvement at Falk and Sullair was due to strong domestic
sales resulting from the improved U.S. economy. However, the growth in Falk's
sales was offset in part by the effect of the second quarter 1994 divestiture
of an 85 percent interest in Sundstrand do Brasil. The increase in Milton Roy's
sales was due to the effect of the first quarter acquisitions of HMD Group
Limited and the business of The Kontro Company, Inc. (HMD-Kontro) partially
offset by lower instruments and European metering pump sales.
25
<PAGE> 28
Management's Discussion and Analysis
<TABLE>
<CAPTION>
Operating profit (amounts in millions) and 1995 1994 1993
------------------------------------------------------------------
operating profit as a percent of net sales Amount % Amount % Amount %
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Business segment
Aerospace . . . . . . . . . . . . . . . . . . . . $ 54 7.4 $ 88 12.4 $ 106 14.1
Industrial . . . . . . . . . . . . . . . . . . . 121 16.2 106 16.0 84 13.4
- ----------------------------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . $ 175 11.9 $ 194 14.1 $ 190 13.8
============================================================================================================================
</TABLE>
<TABLE>
[Bar Chart:]
Operating Profit
(millions of dollars) 1991 1992 1993 1994 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aerospace . . . . . . . . . . . . . . . . . . . . . 128 91 106 88 54
Industrial. . . . . . . . . . . . . . . . . . . . . 78 82 84 106 121
- -----------------------------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . 206 173 190 194 175
=============================================================================================================================
</TABLE>
OPERATING PROFIT BY BUSINESS SEGMENT
Aerospace segment operating profit decreased by $34 million to $54 million in
1995 from $88 million in 1994. Excluding the 1995 restructuring charge of $48
million and the related period costs of $6 million, 1995 operating profit was
$108 million, or 14.9 percent of sales. The operating profit increase,
excluding the restructuring, was due primarily to the increase in high-margin
commercial aftermarket sales in 1995 and the effect of short-term manufacturing
inefficiencies in 1994.
Aerospace segment operating profit was $88 million in 1994 compared with
$106 million in 1993. The decrease was due primarily to the previously
discussed decline in military sales and the effect of short-term manufacturing
inefficiencies partially offset by lower marketing and administrative expenses
resulting from the 1992 Aerospace restructuring. The short-term manufacturing
inefficiencies, which reduced operating profit substantially in 1994, were
related primarily to the transfer of production from the closed Brea and San
Diego, California, plants to other Aerospace facilities.
Industrial segment operating profit was $121 million in 1995 compared with
$106 million in 1994. The increase was due primarily to increased sales and
higher operating profit margins from all three Industrial businesses, partially
offset by the restructuring charge recorded to write down the assets of
Spectronic.
Industrial segment operating profit was $106 million in 1994, a $22 million
increase from 1993. The increase was the result of improved sales and
operating margins at all three businesses, with gains at Falk and Sullair
outpacing those at Milton Roy. Falk's improvement related primarily to the
recovering U.S. economy. Sullair also benefited from the improvement in the
U.S. economy as well as from improved results from its European operations.
Milton Roy benefited from the HMD-Kontro acquisition.
RESTRUCTURING
During 1995, the Company's Board of Directors approved a restructuring plan
which resulted in a pretax charge of $58 million. The charge was taken to
reduce excess manufacturing capacity caused by reductions in manufacturing
volume and increases in manufacturing productivity, and to write down the
assets of Spectronic and the Aerospace segment's Advanced Power Technology
product line (APT) in anticipation of their divestitures. The charge included
$24 million in termination benefits for approximately 350 employees, primarily
consisting of workers at the Company's Lima, Ohio, facility. Also included in
the charge was $29 million for the write-down of the assets of the Lima
facility, Spectronic, and APT, as well as $5 million for the disposition of the
Lima facility. The shutdown and disposition of the Lima facility are expected
to be completed by the end of 1996 and the sales of Spectronic and a majority
interest in APT were completed in the third quarter of 1995. The net effect of
related expenses which were not subject to accrual, cost savings, and
nonrecurring gains resulted in pretax costs of $5 million in 1995 and are
projected to result in pretax benefits of $4 million and $14 million in 1996
and 1997, respectively. Excluding the effect of the Spectronic and APT
dispositions, the restructuring reduced cash flow by about $13 million in 1995
and is expected to provide cash flow benefits of about $1 million and $7
million in 1996 and 1997, respectively.
During 1995, approximately $1 million was paid and charged against the
restructuring liability. Additionally, approximately $6 million was charged
directly to earnings related primarily to the movement of equipment from the
Lima facility to other manufacturing sites.
26
<PAGE> 29
FOREIGN OPERATIONS AND ACTIVITY
The Company has been expanding its international activity over the past several
years, in part through joint-venture operations, acquisitions, and development
of foreign subsidiaries. Accordingly, the Company enters into foreign currency
forward contracts primarily to protect specific assets and liabilities and
certain cash flows from foreign currency exchange rate fluctuations. As a
result, foreign exchange rate fluctuations are not expected to have a material
impact on the Company's financial condition or operations. For further
information related to foreign currency forward contracts see the Summary of
Significant Accounting Policies note on pages 36 and 37 and the Financial
Instruments With Off-Balance-Sheet Risk note on pages 41 and 42.
The Company continues to explore a variety of strategies to expand its
international presence, including joint ventures and distributor arrangements.
Markets in high-growth areas, such as the Asia-Pacific region, continue to be
the focus of the Company's efforts. During 1995, Milton Roy increased its
ownership in Asia LMI Pte. Ltd., a pump manufacturer in India, to 70 percent.
While there is risk inherent in entering these markets, the Company expects its
investments to result in long-term benefits.
UNFILLED ORDERS
Unfilled orders increased by $184 million to $931 million at December 31, 1995,
compared with $747 million at December 31, 1994. The increase was due
primarily to a $172 million long-term contract to provide the propulsion system
for the United Kingdom's Royal Navy Spearfish heavyweight torpedo program.
Unfilled orders in the Aerospace and Industrial segments increased by $170
million and $14 million, respectively, since the beginning of the year.
Aerospace segment unfilled orders at December 31, 1996, are expected to
approximate the level at December 31, 1995. Industrial segment unfilled orders
at December 31, 1996, are expected to decrease slightly from the level at
December 31, 1995.
DIVESTITURES
On July 12, 1995, the Company sold Spectronic for $19 million to Life Sciences
International Plc., London, England. On September 6, 1995, the Company sold a
majority interest in APT in a leveraged buy out by a management-led group. The
losses on both of these sales were recognized as part of the asset write-down
included in the restructuring charge discussed earlier.
On November 12, 1993, the Company sold the assets of Sundstrand Data
Control (SDC) to AlliedSignal. For a more detailed discussion, see the
Sundstrand Data Control Division Sale note on page 37.
AUXILIARY POWER UNITS
The Company's Power Systems product line includes auxiliary power units (APUs)
developed and produced for both the military and commercial aerospace markets.
As part of an effort to capitalize on potential growth in certain segments of
the commercial APU market, the Company and Labinal, Inc. are parties to a
joint venture, Auxiliary Power International Corporation (APIC). Other than
the decision by McDonnell Douglas to launch the MD-95, for which APIC is
supplying the APU, the Company continues to project that near-term growth
opportunities in this market segment will be limited by the development of
fewer aircraft by the major airframe manufacturers in the future.
Participation in this market has required substantial expenditures by the
Company and APIC and APIC's products have encountered strong competition from
an established supplier.
ENVIRONMENTAL MATTERS
For a detailed discussion, see the Environmental Matters note on pages 43 and
44.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by $20 million to $323 million at December 31, 1995,
from $303 million at December 31, 1994. The increase was due primarily to
lower notes payable and higher inventories, partially offset by the current
portion of the restructuring reserve. Notes payable decreased as available
cash was used to reduce short-term debt and inventories increased in response
to higher sales and order activity.
27
<PAGE> 30
Management's Discussion and Analysis
Net cash flow from operating activities in 1995 increased to $197 million
from $108 million in 1994. Excluding the restructuring, which reduced 1995
cash flow by approximately $13 million, the increase was due primarily to
improved net earnings in 1995 and a $35 million tax payment related to the gain
from the sale of SDC which decreased the 1994 net operating cash flow.
Net cash flow from operating activities in 1994 was $108 million, a $134
million decrease from 1993. The decrease was due primarily to changes in
accounts receivable and inventory balances, which generated $7 million of cash
flow during 1994, compared with $82 million in 1993, and the previously
mentioned $35 million tax payment related to the gain on the sale of SDC.
In 1995, the Company used $44 million of cash for investing activities,
primarily for the purchase of fixed assets, an investment in an industrial
revenue bond (IRB) trust, and the purchase of the ram air turbine product line
of Dowty Aerospace Hydraulics, Dowty Group Plc., Cheltenham, England, offset in
part by the proceeds from the sale of assets. The IRB trust was formed to fund
capital improvements at the Company's Auburn, Alabama, facility and proceeds
from the sale of assets included cash received in conjunction with the
dispositions of Spectronic and APT. During 1995, the Company used $136 million
of cash for financing activities, primarily to repurchase common stock, repay
both short-term and long-term borrowings, and pay dividends.
In 1994, the Company used $77 million of cash for investing activities,
primarily for the purchase of fixed assets and the HMD-Kontro acquisition.
Financing activities provided $33 million of cash in 1994, primarily net
borrowings supported by lines of credit and borrowings for the HMD-Kontro
acquisition, partially offset by cash used to repurchase common stock and pay
dividends.
In 1993, the Company generated $144 million of cash from investing
activities due primarily to the sale of SDC, partially offset by the purchase
of fixed assets. The Company used $364 million of cash for financing
activities for repurchases of the Company's stock, debt repayments, and
dividend payments.
At December 31, 1995, a total of $335 million of unsecured revolving
domestic credit facilities, all of which was unused, was being provided to the
Company by seven banks. The Company also maintains foreign lines of credit for
use in foreign operations totaling the equivalent of approximately $20 million,
of which $1 million was used at December 31, 1995. The entire unused portion
of these credit facilities was available under the Company's most restrictive
debt covenants at December 31, 1995. Cash flow from operating activities and
access to credit facilities and the commercial paper market provide the Company
with current and continuing sources of liquidity.
The Company issues commercial paper in the United States, which is
supported by its domestic revolving credit facilities. At December 31, 1995
and 1994, the Company had $167 million and $193 million of commercial paper
outstanding, respectively.
<TABLE>
<CAPTION>
[Bar chart:]
Operating Cash Flow
(millions of dollars) 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
183 231 242 108 197
</TABLE>
On June 20, 1995, the Company was authorized by its Board of Directors to
issue up to an additional $150 million of long-term debt. During the fourth
quarter of 1995, the Company arranged a private shelf facility with the
Prudential Insurance Company of America which will allow it quick access to the
private debt market through November 1998. On February 8, 1996, the Company
filed a shelf registration statement on Form S-3 with the Securities and
Exchange Commission which will facilitate quick access to the public debt
market.
On February 20, 1996, the Company's Board of Directors authorized a
two-for-one stock split payable as a 100 percent stock dividend to be
distributed on March 19, 1996, to shareholders of record on March 5, 1996. All
per share amounts have been adjusted or restated to reflect the split.
On November 16, 1993, the Company's Board of Directors expanded its
authorization for the repurchase of the Company's outstanding common stock to a
total of 10 million shares, up 6 million shares from the previous authorization
granted on February 16, 1993. The Company will consider a variety of options
for the repurchase of the shares, from time to time, including open market,
Dutch auction, and other purchases. The Company currently intends to hold the
repurchased shares as treasury stock. The Company had purchased 6 million
shares through December 31, 1995, pursuant to the repurchase authorization, at
a total purchase price of $271 million. Funds for the repurchases were
provided by the Company's 4(2) commercial paper program and operating
activities.
In December 1993, the Company recorded an extraordinary loss of $5 million,
or $.07 per share, for the early retirement of high-cost, long-term debt. The
extraordinary loss was due to the redemption premiums paid to holders of its
9.375% bonds and 12.0% notes, and the writeoff of capitalized debt issuance
costs associated with these instruments. Funds used to redeem these
instruments were provided by the net proceeds from the sale of SDC.
Interest expense decreased by $10 million in 1994 compared with 1993
primarily as a result of the debt retirement.
The Company uses debt to the extent internally generated cash flow is
insufficient to meet its requirements.
28
<PAGE> 31
<TABLE>
<CAPTION>
[Bar chart:]
Capitalization
(millions of dollars) 1991 1992 1993 1994 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Debt 455 479 282 441 396
Equity 692 530 512 494 481
- -----------------------------------------------------------------------------------------------------------
Total 1,147 1,009 794 935 877
===========================================================================================================
</TABLE>
Accordingly, the ratio of its total debt to total capital is important since it
indicates the Company's capacity to absorb additional debt. This ratio was
45.2 percent at the end of 1995, compared with 47.1 percent at the end of 1994,
and 35.5 percent at the end of 1993. The decrease in 1995 was due primarily to
the previously discussed decrease in notes payable and the increase in retained
earnings partially offset by the effects of the share repurchase program.
Assuming no additional share repurchases, the Company expects the
total-debt-to-total-capital ratio to be less than 40 percent by the end of
1996.
Capital expenditures, cash dividend payments, and working capital
requirements will be financed from the Company's continuing sources of
liquidity.
The Company remains actively involved in evaluating potential acquisitions,
which may be financed with internal cash flow, debt, stock, or a combination
thereof.
Capital expenditures (excluding leased equipment) consisting primarily of
normal replacements of property, plant, and equipment were $62 million in 1995,
compared with $54 million in 1994. Capital expenditures in 1996 are expected
to be approximately $65 million.
Total research and development expenditures for the years 1995, 1994, and
1993 were $113 million, $109 million, and $127 million, respectively, of which
$47 million, $45 million, and $50 million, respectively, was funded by
customers. The Company expects 1996 research and development expenditures to
be approximately $120 million, including approximately $50 million of which
will be customer funded.
TAX ISSUES
For a detailed discussion, see the Income Taxes note on pages 40 and 41.
GOVERNMENT CONTRACT MATTERS
A portion of the Company's business results from contracts with or for
government agencies. Military sales in 1995 were $243 million, of which 42
percent and 58 percent were from prime contracts and subcontracts,
respectively. The Company's military sales in 1994 were $279 million, of which
31 percent and 69 percent were from prime contracts and subcontracts,
respectively. The Company's military sales in 1993 were $323 million, of which
32 percent and 68 percent were from prime contracts and subcontracts,
respectively. In addition, sales where the final customer was the U.S.
government represented 75 percent, 87 percent, and 88 percent of total military
sales in 1995, 1994, and 1993, respectively.
For additional discussions on government contract matters, see the
Government Contract Matters note on page 44.
OUTLOOK
Aerospace
Certain events, such as recent aircraft orders, airline traffic growth, and the
improved profitability of airlines, appear to indicate that momentum is
building in the recovery of the commercial aerospace markets. As a result of a
strong market position coupled with benefits attributable to recent
restructurings, the Company believes that its Aerospace business is well
situated to take advantage of this recovery. Additionally, it appears that the
Aerospace military market, which had been declining, is stabilizing.
Industrial
Prospects for growth in the Company's Industrial businesses continue to be
favorable in the near future, but at a slower pace than the growth experienced
in 1995. These businesses will continue to work on penetrating the more
rapidly growing economies worldwide in addition to participating in the growth
projected for the U.S. economy.
Forecast
The following discussion contains forward-looking information which should be
read in conjunction with the cautionary language on page 25 at the beginning of
management's discussion and analysis.
Excluding divested non-core businesses and restructuring costs, the Company
projects that 1996 sales will improve by 5 percent to 10 percent, which should
generate earnings of between $2.25 and $2.40 per share.
Total Aerospace sales are expected to grow by 5 percent to 10 percent
during 1996 and are expected to generate substantial improvement in the
operating profit margin. Included in the 1996 sales growth are projections of
a 10 percent to 20 percent increase in the commercial OEM market, an increase
of approximately 5 percent in the commercial aftermarket, and a marginal
increase in military sales, compared with 1995.
Total Industrial sales are also expected to grow by about 5 percent to 10
percent excluding Spectronic, with a related improvement in operating
profitability.
29
<PAGE> 32
Consolidated Statement of Earnings
Sundstrand Corporation and Subsidiaries (SNS)
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
(Amounts in millions except per share data)
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,473 $1,373 $1,383
Costs and expenses:
Costs of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . 957 916 912
Marketing and administration . . . . . . . . . . . . . . . . . . . . . . . 297 280 292
Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 - -
- -------------------------------------------------------------------------------------------------------------------------
1,312 1,196 1,204
- -------------------------------------------------------------------------------------------------------------------------
Earnings before other income (deductions) . . . . . . . . . . . . . . . . . . 161 177 179
Other income (deductions):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33) (30) (40)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4 4
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (2) (10)
- -------------------------------------------------------------------------------------------------------------------------
(26) (28) (46)
- -------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes
and extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . 135 149 133
Less income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 53 42
- -------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before extraordinary item . . . . . . . . 79 96 91
Loss from discontinued SDC business,
prior to discontinuance, net of taxes . . . . . . . . . . . . . . . . . . . - - (1)
Gain on sale of SDC, net of taxes . . . . . . . . . . . . . . . . . . . . . . - - 56
- -------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item . . . . . . . . . . . . . . . . . . . . . 79 96 146
Extraordinary loss on early retirement of debt, net of taxes . . . . . . . . - - (5)
- -------------------------------------------------------------------------------------------------------------------------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79 $ 96 $ 141
=========================================================================================================================
Weighted-average number of common shares outstanding
(adjusted for the stock split) . . . . . . . . . . . . . . . . . . . . . . 62.7 65.4 70.9
Earnings per share (adjusted for the stock split):
Earnings from continuing operations before extraordinary item . . . . . . . $ 1.25 $ 1.46 $ 1.28
Loss from discontinued SDC business, prior to discontinuance . . . . . . . - - (.01)
Gain on sale of SDC . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - .78
- -------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item . . . . . . . . . . . . . . . . . . . . 1.25 1.46 2.05
Extraordinary loss on early retirement of debt . . . . . . . . . . . . . . - - (.07)
- -------------------------------------------------------------------------------------------------------------------------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.25 $ 1.46 $ 1.98
=========================================================================================================================
Cash dividends per common share (adjusted for the stock split) . . . . . . . $ .60 $ .60 $ .60
</TABLE>
See Notes to Consolidated Financial Statements
30
<PAGE> 33
Consolidated Statement of Cash Flows
Sundstrand Corporation and Subsidiaries (SNS)
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C>
Cash flow from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79 $ 96 $ 141
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 60 69
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 18 19
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (14) (15) 5
Change in operating assets and liabilities excluding
the effects of acquisitions and divestitures:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (2) 41
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32) 9 41
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2 11
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 12 (7)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 (79) (17)
Cash provided by discontinued SDC business . . . . . . . . . . . . . . . . - - 12
Pretax gain on sale of SDC . . . . . . . . . . . . . . . . . . . . . . . . - - (90)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7 17
- -----------------------------------------------------------------------------------------------------------------------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 12 101
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . 197 108 242
- -----------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Cash paid for property, plant, and equipment . . . . . . . . . . . . . . . (63) (52) (58)
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . 43 10 10
Cash paid for HMD-Kontro, net of cash acquired . . . . . . . . . . . . . . - (25) -
Cash paid for Dowty ram air turbine business . . . . . . . . . . . . . . . (8) - -
Investment in IRB trust . . . . . . . . . . . . . . . . . . . . . . . . . . (14) - -
Investment in equity companies . . . . . . . . . . . . . . . . . . . . . . (2) (10) (1)
Proceeds from sale of discontinued SDC business . . . . . . . . . . . . . . - - 193
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities . . . . . . . . . . . . (44) (77) 144
- -----------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Net borrowings (payments) supported by lines of credit . . . . . . . . . . (26) 143 (33)
Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . (23) (9) (164)
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 8 - -
Additional debt for HMD-Kontro acquisition . . . . . . . . . . . . . . . . - 25 -
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . (60) (87) (124)
Proceeds from stock options exercised . . . . . . . . . . . . . . . . . . . 3 - -
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38) (39) (43)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities . . . . . . . . . . . . (136) 33 (364)
- -----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . (8) (13) (12)
- -----------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . 9 51 10
Cash and cash equivalents at January 1 . . . . . . . . . . . . . . . . . . 66 15 5
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 . . . . . . . . . . . . . . . . . . $ 75 $ 66 $ 15
=======================================================================================================================
Supplemental cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34 $ 32 $ 46
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64 $ 98 $ 72
</TABLE>
See Notes to Consolidated Financial Statements
31
<PAGE> 34
Consolidated Balance Sheet
Sundstrand Corporation and Subsidiaries (SNS)
<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
(Amounts in millions except share data)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75 $ 66
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 293
Inventories, net of progress payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 330 307
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 55
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 14
- -------------------------------------------------------------------------------------------------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 761 735
Property, Plant, and Equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449 459
Intangible Assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266 286
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 62
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 45
- -------------------------------------------------------------------------------------------------------------------------
$ 1,593 $ 1,587
=========================================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 168 $ 194
Long-term debt due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 11
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 95
Accrued salaries, wages, and commissions . . . . . . . . . . . . . . . . . . . . . . . . . 24 23
Accrued postretirement benefits other than pensions . . . . . . . . . . . . . . . . . . . . 17 19
Restructuring liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 -
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 90
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 438 432
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 236
Accrued Postretirement Benefits Other Than Pensions . . . . . . . . . . . . . . . . . . . . . 363 357
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 68
Shareholders' Equity
Common stock, par value $.50 per share; authorized 150,000,000 shares;
issued 1995 and 1994 - 37,843,014 shares (including shares in treasury) . . . . . . . . . 19 19
Additional contributed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 147
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623 582
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . (11) (9)
Common stock in treasury (at cost); 1995 - 6,995,179 shares
and 1994 - 6,207,043 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (287) (234)
Unamortized value of restricted stock issued . . . . . . . . . . . . . . . . . . . . . . . (14) (11)
- -------------------------------------------------------------------------------------------------------------------------
481 494
- -------------------------------------------------------------------------------------------------------------------------
$ 1,593 $ 1,587
=========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
32
<PAGE> 35
Consolidated Statement of Shareholders' Equity
Sundstrand Corporation and Subsidiaries (SNS)
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
(Amounts in millions except share data)
<S> <C> <C> <C>
Common Stock
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19 $ 19 $ 19
==============================================================================================================================
Additional Contributed Capital
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 147 $ 147 $ 139
Stock issued under employee stock plans . . . . . . . . . . . . . . . . . . 4 - 8
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 151 $ 147 $ 147
==============================================================================================================================
Retained Earnings
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 582 $ 525 $ 427
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 96 141
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38) (39) (43)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 623 $ 582 $ 525
==============================================================================================================================
Foreign Currency Translation Adjustment
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (9) $ (11) $ (9)
Adjustment for the year . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 2 (2)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ (11) $ (9) $ (11)
==============================================================================================================================
Common Stock in Treasury
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (234) $ (154) $ (39)
Purchase of 960,200, 1,768,300, and 3,273,300 shares for treasury
in 1995, 1994, and 1993, respectively . . . . . . . . . . . . . . . . . (60) (80) (131)
Stock issued under employee stock plans . . . . . . . . . . . . . . . . . . 8 4 17
Purchase of shares previously issued under
employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (4) (1)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ (287) $ (234) $ (154)
==============================================================================================================================
Unamortized Value of Restricted Stock Issued
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (11) $ (14) $ (7)
Stock issued under employee stock plans . . . . . . . . . . . . . . . . . . (8) (4) (12)
Purchase of shares previously issued under
employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 -
Net amortization of deferred compensation under
employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3 5
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ (14) $ (11) $ (14)
==============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
33
<PAGE> 36
Information by Business Segment
Sundstrand Corporation and Subsidiaries (SNS)
Financial data with respect to the various business segments in which the
Company operates are set forth below. Intersegment sales are immaterial.
Military sales occur primarily in the Aerospace segment.
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C>
Net sales
Aerospace(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 726 $ 710 $ 754
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747 663 629
- ------------------------------------------------------------------------------------------------------------------------------
$ 1,473 $ 1,373 $ 1,383
==============================================================================================================================
The above includes:
Military sales (final customer is primarily the
U.S. government) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 243 $ 279 $ 323
==============================================================================================================================
Export sales of domestically manufactured products
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 152 $ 137 $ 132
Asia/Pacific Rim . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 111 102
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 70 62
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 49 44
- ------------------------------------------------------------------------------------------------------------------------------
$ 417 $ 367 $ 340
==============================================================================================================================
(a) Sales of the electric power systems product line were $462 million, $441 million, and $449 million in 1995, 1994,
and 1993, respectively.
- ------------------------------------------------------------------------------------------------------------------------------
Operating profit
Aerospace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54 $ 88 $ 106
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 106 84
- ------------------------------------------------------------------------------------------------------------------------------
Total operating profit . . . . . . . . . . . . . . . . . . . . . . . . . 175 194 190
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33) (30) (40)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4 4
General corporate expenses . . . . . . . . . . . . . . . . . . . . . . . . . (14) (14) (15)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (5) (6)
- ------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes
and extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . $ 135 $ 149 $ 133
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
Assets
Aerospace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 813 $ 832 $ 856
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 596 600 527
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 155 129
- ------------------------------------------------------------------------------------------------------------------------------
$ 1,593 $ 1,587 $ 1,512
==============================================================================================================================
Capital expenditures (includes leased equipment)
Aerospace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34 $ 28 $ 32
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 19 20
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7 4
- ------------------------------------------------------------------------------------------------------------------------------
$ 62 $ 54 $ 56
==============================================================================================================================
Depreciation and amortization (includes leased equipment)
Aerospace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53 $ 54 $ 61
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 22 23
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2 4
- ------------------------------------------------------------------------------------------------------------------------------
$ 77 $ 78 $ 88
==============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
34
<PAGE> 37
Information by Business Segment (Continued)
Sundstrand Corporation and Subsidiaries (SNS)
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C>
Geographic Areas
Net sales
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,301 $ 1,243 $ 1,241
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 130 142
- -------------------------------------------------------------------------------------------------------------------------------
$ 1,473 $ 1,373 $ 1,383
===============================================================================================================================
Operating profit
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158 $ 180 $ 185
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 14 5
- -------------------------------------------------------------------------------------------------------------------------------
$ 175 $ 194 $ 190
===============================================================================================================================
Assets
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,405 $ 1,409 $ 1,348
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 178 164
- -------------------------------------------------------------------------------------------------------------------------------
$ 1,593 $ 1,587 $ 1,512
===============================================================================================================================
</TABLE>
Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
- -------------------------------------------------------------------------------------------------------------------------------
March 31(a) June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------------------------------------------------------
(Amounts in millions except per share data)
<S> <C> <C> <C> <C>
1995
Net sales . . . . . . . . . . . . . . . . . . . . . . . . $ 346 $ 377 $ 355 $ 395
Gross profit . . . . . . . . . . . . . . . . . . . . . . $ 120 $ 130 $ 129 $ 137
Net earnings (loss) . . . . . . . . . . . . . . . . . . . $ (18) $ 27 $ 34 $ 36
Earnings (loss) per share(b) . . . . . . . . . . . . . . $ (.29) $ .44 $ .53 $ .57
1994
Net sales . . . . . . . . . . . . . . . . . . . . . . . . $ 324 $ 331 $ 340 $ 378
Gross profit . . . . . . . . . . . . . . . . . . . . . . $ 100 $ 110 $ 114 $ 133
Net earnings . . . . . . . . . . . . . . . . . . . . . . $ 18 $ 19 $ 24 $ 35
Earnings per share(b) . . . . . . . . . . . . . . . . . . . $ .27 $ .29 $ .36 $ .54
</TABLE>
(a) 1995 includes a restructuring charge of $58 million before taxes ($40
million after taxes equivalent to $.64 per share) related to the reduction
of manufacturing capacity and the divestiture of two non-core product
lines.
(b) Amounts adjusted or restated to reflect the effects of the Company's
two-for-one stock split payable in the form of a 100 percent stock
dividend authorized by the Board of Directors on February 20, 1996.
See Notes to Consolidated Financial Statements
35
<PAGE> 38
Notes to Consolidated Financial Statements
NATURE OF OPERATIONS
Sundstrand Corporation is a multinational organization engaged in the design,
manufacture, and sale of a variety of proprietary, technology-based components
and systems for diversified international aerospace and industrial markets.
The Industrial and Aerospace businesses are approximately equal in size based
on sales. The principal markets for the Aerospace business are airframe
manufacturers located primarily in the United States and Europe as well as
world airlines. The ultimate customer for a significant portion of the
Aerospace business is the United States government. The Industrial businesses
serve a wide range of markets, primarily in the United States and Europe, but
with growing activity in Asia and South America.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation provide for the inclusion of the accounts of
Sundstrand Corporation and all subsidiaries. All intercompany transactions are
eliminated in consolidation.
Estimates are used in the preparation of financial statements in conformity
with generally accepted accounting principles. These management estimates,
which include estimates of total contract costs used in determining sales to be
recorded under long-term contracts, affect the reported amounts included in the
financial statements and accompanying footnotes. Actual results could differ
from these estimates.
Cash Equivalents are considered by the Company to be all highly liquid debt
instruments purchased with original maturities of three months or less.
Sales Under Long-Term Contracts, a portion of which are with the U.S.
government, are accounted for under the percentage of completion method. The
Company enters into long-term contracts which require it to develop or advance
state-of-the-art technology products. Sales on developmental contracts are
recorded as the related costs are incurred and include estimated profits
calculated on the basis of the relationship between costs incurred and total
estimated costs (cost-to-cost method of percentage of completion). The Company
also enters into long-term contracts for the manufacture of products. Sales on
production-type contracts are recorded as deliveries are made
(units-of-delivery method of percentage of completion). Marketing and
administrative costs are expensed as incurred.
On a selective basis, the Company may enter into a contract to research and
develop or manufacture a product with a loss anticipated at the date the
contract is signed. These contracts are entered into in anticipation that
profits will be obtained from future contracts for the same or similar
products. These loss contracts often provide the Company with intellectual
property rights which, in effect, establish it as the sole producer of certain
products. Such losses are recognized at the date the Company becomes
contractually obligated, with revisions made as changes occur in the related
estimates to complete.
Certain contracts and subcontracts are subject to government audit and
review. Information related to government contract matters is presented on
page 44.
Inventories are stated at the lower of cost (principally first-in,
first-out method) or market. Certain inventories are valued using the last-in,
first-out method. Inventoried costs relating to long-term contracts are
accounted for based on the percentage-of-completion methods described above.
Property, Plant, and Equipment is recorded at cost and depreciation is
generally provided on the straight-line basis by charges to expense at rates
based on the estimated useful lives of the assets. Estimated useful lives
range from 3 to 20 years for machinery and equipment and 10 to 40 years for
buildings. Expenditures for new facilities and expenditures that substantially
increase the useful lives of the property are capitalized. Maintenance and
repairs are expensed as incurred.
Intangible Assets of $266 million and $286 million at December 31, 1995 and
1994, respectively (net of accumulated amortization of $87 million and $81
million, respectively), consist primarily of goodwill associated with certain
acquisitions. Goodwill is amortized primarily over 40 years using the
straight-line method.
The Company annually evaluates whether a change in the estimated useful
life of goodwill is warranted or whether the remaining goodwill balance may be
impaired. The Company currently believes that no impairment of goodwill has
occurred. However, if the estimated cumulative undiscounted cash flow, before
interest, over the remaining life of the goodwill indicated an impairment, a
reduction for impairment of goodwill would be recorded.
Stock-based compensation is recorded based on the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees."
Derivative Financial Instruments in the form of foreign currency forward
contracts are entered into by the Company as a hedge against foreign currency
exposures. These contracts limit the Company's exposure to both favorable and
unfavorable currency fluctuations. On contracts which are designated as a
hedge of a firm commitment, a net investment in a foreign entity, or an
intercompany loan of a long-term nature, gains and losses are deferred and
included in the measurement of the hedged transaction upon settlement. Gains
and losses on other foreign currency forward contracts, including contracts
which relate to anticipated transactions, are reflected in the financial
statements in the period in which the currency fluctuation occurs.
The Company has strict controls regarding the use of derivative financial
instruments. The required level of authorization for the use of derivative
instruments increases based on their relative risk characteristics. The use of
leveraged derivatives is prohibited. In order to manage credit risk related to
foreign currency forward contracts, the Company utilizes only highly rated
commercial banks or financial institutions for such purposes. Compliance with
this policy is monitored on an ongoing basis, and is reviewed and approved
annually by the Finance Committee of the Company's Board of Directors.
36
<PAGE> 39
Information by Business Segment is presented on pages 34 and 35.
Quarterly Results are presented on page 35.
ADDITIONAL STATEMENT OF CASH FLOWS INFORMATION
Excluded from the 1993 Consolidated Statement of Cash Flows was $12 million of
non-cash financing activities related to the conversion of Phantom Stock and
Cash Equivalent Rights liabilities to Restricted Stock under the Company's
Stock Incentive Plan. For additional information on this plan see the Stock
Incentive Plan note on pages 42 and 43.
SUNDSTRAND DATA CONTROL DIVISION (SDC) SALE
On November 12, 1993, pursuant to an agreement between AlliedSignal, Inc.
(Allied) and the Company dated July 14, 1993, the Company transferred
substantially all of the assets, business, and properties which were utilized
in connection with the business of SDC to Allied. The purchase price was $191
million and Allied agreed to assume certain liabilities of the business. This
resulted in a pretax gain of $96 million and an after-tax gain of $56 million,
which included earnings generated since the January 31, 1993, measurement date.
Results for prior years have been restated and results for 1993 have been
disaggregated to reflect SDC as a discontinued operation.
RESTRUCTURING
During 1995, the Company's Board of Directors approved a restructuring plan
which resulted in a pretax charge of $58 million. The charge was taken to
reduce excess manufacturing capacity caused by reductions in manufacturing
volume and increases in manufacturing productivity, and to write down the
assets of Milton Roy's Spectronic Instruments business (Spectronic) and the
Aerospace segment's Advanced Power Technology product line (APT) in
anticipation of their divestiture. The charge included $24 million in
termination benefits for approximately 350 employees, primarily consisting of
workers at the Company's Lima, Ohio, facility. Also included in the charge was
$29 million for the write-down of the assets of the Lima facility, Spectronic,
and APT, as well as $5 million for disposition of the Lima facility. The
shutdown and disposition of the Lima facility are expected to be completed by
the end of 1996 and the sales of Spectronic and a majority interest in APT were
completed in the third quarter of 1995.
During 1995, approximately $1 million was paid and charged against the
restructuring liability. Additionally, approximately $6 million was charged
directly to earnings related primarily to the movement of equipment from the
Lima facility to other manufacturing sites.
ACCOUNTS RECEIVABLE, NET
The components of net accounts receivable at December 31, 1995 and 1994, were:
<TABLE>
<CAPTION>
(Amounts in millions) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. government
Amounts billed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33 $ 40
Unbilled costs and accrued profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 30
- -----------------------------------------------------------------------------------------------------------------------------
58 70
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 223
- -----------------------------------------------------------------------------------------------------------------------------
$ 281 $ 293
=============================================================================================================================
INVENTORIES
The components of inventories at December 31, 1995 and 1994, were:
(Amounts in millions) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51 $ 49
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 117
Finished goods and parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 155
- -----------------------------------------------------------------------------------------------------------------------------
348 321
Less progress payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 14
- -----------------------------------------------------------------------------------------------------------------------------
$ 330 $ 307
=============================================================================================================================
</TABLE>
Prior to the application of progress payments, the inventories shown above
included costs of $52 million and $51 million at December 31, 1995 and 1994,
respectively, related to long-term contracts.
37
<PAGE> 40
Notes to Consolidated Financial Statements
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 1995 and 1994, was classified as
follows:
<TABLE>
<CAPTION>
(Amounts in millions) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40 $ 39
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 230
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792 775
- -------------------------------------------------------------------------------------------------------------------------
1,062 1,044
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613 585
- -------------------------------------------------------------------------------------------------------------------------
$ 449 $ 459
=========================================================================================================================
</TABLE>
During 1994, the Company changed its estimate of the average useful
lives used to compute depreciation for certain fixed assets. This change
resulted from internal asset management procedures that are designed to ensure
continued compliance with government contract accounting requirements and was
made to reflect better the estimated periods during which such assets will
remain in service. The change had the effect of increasing net earnings by $6
million, or $.08 per share, in the year ended December 31, 1994.
PENSION BENEFITS
The Company has defined benefit pension plans covering substantially all U.S.
employees. Pay-related plans generally provide pension benefits that are based
on the employee's highest compensation during a three-year period or the
employee's average career compensation, prior to retirement. Nonpay-related
plans provide benefits of stated amounts for each year of service. Pension
plans for U.S. employees have been funded at amounts equal to or greater than
the minimum required by ERISA.
Pension cost for 1995, 1994, and 1993 included:
<TABLE>
<CAPTION>
(Amounts in millions) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of current period . . . . . . . . . . . . . . . . . . . . . . . $ 16 $ 19 $ 17
Interest cost on projected benefit obligation . . . . . . . . . . . . . . . 47 44 39
Less recognized (loss) gain on plan assets . . . . . . . . . . . . . . . . . 130 (4) 37
Net amortization and deferral . . . . . . . . . . . . . . . . . . . . . . . . 79 (50) (6)
- -------------------------------------------------------------------------------------------------------------------------
Net pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12 $ 17 $ 13
=========================================================================================================================
</TABLE>
The funded status of the plans at December 31, 1995 and 1994, was:
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Assets in Accum- Assets in Accum-
excess of ulated excess of ulated
accum- benefits accum- benefits
ulated in excess ulated in excess
(Amounts in millions) benefits of assets benefits of assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Benefit obligation liability:
Vested benefits . . . . . . . . . . . . . . . . . . . . . $ 484 $ 16 $ 370 $ 7
Nonvested benefits . . . . . . . . . . . . . . . . . . . 55 1 52 -
- ------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation . . . . . . . . . . . . . 539 17 422 7
Effect of projected future
compensation levels . . . . . . . . . . . . . . . . . . 96 2 83 1
- ------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation . . . . . . . . . . . . . . 635 19 505 8
Less plan assets at market value . . . . . . . . . . . . . 687 4 586 -
- ------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in
excess of (less than) plan assets . . . . . . . . . . . . (52) 15 (81) 8
Adjustments for deferrals of
benefit obligation liability
not yet recognized in cost:
Net experience gain . . . . . . . . . . . . . . . . . . . 79 (2) 101 1
Initial net obligation . . . . . . . . . . . . . . . . . (21) - (24) -
Prior service cost due to
plan amendments . . . . . . . . . . . . . . . . . . . . (1) (1) 1 (1)
Adjustment required to recognize
minimum liability . . . . . . . . . . . . . . . . . . . . - 1 - 1
- ------------------------------------------------------------------------------------------------------------------------
Accrued (prepaid) pension liability . . . . . . . . . . . . $ 5 $ 13 $ (3) $ 9
========================================================================================================================
</TABLE>
The projected benefit obligation was determined using an assumed discount
rate of 7.25 percent at December 31, 1995, and 8.5 percent at December 31,
1994. The assumed weighted-average long-term rate of compensation increase was
4.0 percent at December 31, 1995, and 5.0 percent at December 31, 1994. The
assumed long-term rate of return on plan assets was 9.0 percent at December 31,
1995, and 8.75 percent at December 31, 1994 and 1993. Plan assets consist
principally of common stocks and fixed income investments.
38
<PAGE> 41
During 1993, SDC was sold and, as a result, future benefits for former
employees of this division were fixed causing recognition of an $8 million
curtailment gain, which has been reflected in the gain on the sale of SDC.
The Company also sponsors four defined contribution retirement benefit
plans that cover substantially all U.S. and Puerto Rican employees. All of
these plans are subject to ERISA. Three of the plans are intended to be
maintained under the provisions of Section 401(k) of the Internal Revenue Code
of 1986, as amended, and one plan is intended to be maintained under the Puerto
Rico Income Tax Act of 1954, as amended. Two of these plans provide that the
employer will match certain portions of the employee-directed contributions.
The 1995, 1994, and 1993 Company matching contributions to the above plans were
less than $1 million in each of the three years.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health and life insurance benefits for retired employees
and certain dependents when employees become eligible for these benefits by
satisfying plan provisions, which include certain age and/or service
requirements. Health and life insurance benefits for retirees of domestic
operations are provided through insurance contracts, a group benefit trust or
general assets of the Company. Health and life insurance benefits for retirees
of foreign operations, where applicable, are provided through
government-sponsored plans to which contributions by the Company are required.
The health insurance plans covering substantially all U.S. employees are
contributory, with contributions adjusted annually, and these plans contain
other cost-sharing features such as deductibles and coinsurance. Currently,
the Company requires contributions, which are adjusted annually, primarily from
employees who retired subsequent to 1991. The Company does not prefund these
plans and has the right to modify or terminate any of these plans in the
future.
The components of postretirement benefit cost for 1995, 1994, and 1993
were:
<TABLE>
<CAPTION>
(Amounts in millions) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 $ 4 $ 5
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 22 30
Net amortization and deferral . . . . . . . . . . . . . . . . . . . . . . . . (7) (3) -
- -------------------------------------------------------------------------------------------------------------------------
Postretirement benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . $ 17 $ 23 $ 35
=========================================================================================================================
</TABLE>
The funded status of the plans at December 31, 1995 and 1994, was:
<TABLE>
<CAPTION>
(Amounts in millions) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 193 $ 199
Eligible active plan participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 11
Other active plan participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 56
- ------------------------------------------------------------------------------------------------------------------------
294 266
Plan assets at market value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
- ------------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets . . . . . . . . . . . 294 266
Unrecognized prior period gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 86
Unrecognized prior service gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 24
- ------------------------------------------------------------------------------------------------------------------------
Postretirement benefit liability recognized in the balance sheet . . . . . . . . . . . . . . $ 390 $ 376
========================================================================================================================
</TABLE>
The assumed weighted-average annual rate of increase in the per capita cost
of medical and prescription drug benefits (applicable only to employees who
retired prior to 1992) is 7 percent for 1996 and is assumed to decrease
gradually each year from 1996 to 2000 and remain level at 5 percent
thereafter. The assumed weighted-average annual rate of increase in the per
capita cost of dental benefits (applicable only to employees who retired prior
to 1992) is 6 percent in 1996 and is assumed to decrease to 5 percent in 1997
and remain level at that rate thereafter. These rates have no effect on the
Company's costs for employees retiring after 1991 as the Company's policy is to
increase retiree contributions so that the Company's annual per capita cost
increases at the general inflation rate. The assumed annual rate of increase
in the general inflation rate (applicable to employees retiring after 1991) is
4 percent.
A 1 percent increase in the annual health care trend rates would have
increased the accumulated postretirement benefit obligation at December 31,
1995 and 1994, by $19 million and $16 million, respectively, and increased
postretirement benefit expense for 1995, 1994, and 1993 by $1 million, $1
million, and $4 million, respectively. The weighted-average discount rate used
to estimate the accumulated postretirement benefit obligation was 7.5 percent
at December 31, 1995, and 8.75 percent at December 31, 1994.
During 1995, the Company decided to shut down its Lima, Ohio, facility.
This decision resulted in the recognition of a $12 million curtailment loss,
which was reflected in the restructuring charge. For more information related
to this charge see the Restructuring note on page 37. During 1993, SDC was
sold and, as a result, future benefits for former employees of this division
were fixed causing recognition of a $11 million curtailment gain, which has
been reflected in the gain on the sale of SDC.
39
<PAGE> 42
Notes to Consolidated Financial Statements
INCOME TAXES
Income tax expense for the three years ended December 31, 1995, consisted of
the following components:
<TABLE>
<CAPTION>
(Amounts in millions) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . $ 69 $ 64 $ 37
Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . (13) (11) 5
- ------------------------------------------------------------------------------------------------------------------------
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . $ 56 $ 53 $ 42
========================================================================================================================
Total income tax expense (benefit) includes:
State tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7 $ 9 $ 8
Foreign tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8 $ 7 $ (3)
</TABLE>
State and foreign income taxes for 1995, 1994, and 1993 were principally
current.
Total income tax expense for each year varied from the amount computed by
applying the statutory U.S. federal income tax rate to earnings before income
taxes for the reasons set forth in the following reconciliation:
<TABLE>
<CAPTION>
(Amounts in millions) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense at the statutory rate . . . . . . . . . . . . . . . . . . $ 47 $ 52 $ 47
Increases (reductions) in taxes resulting from:
State taxes based on income, net of federal income taxes . . . . . . . . . 5 6 5
Adjustments to prior year accruals . . . . . . . . . . . . . . . . . . . . 3 4 (3)
Taxes on subsidiaries at rates other than the
statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 1 (2)
Additional earnings of foreign subsidiaries
now deemed to be permanently invested . . . . . . . . . . . . . . . . . . - (8) -
Book/tax difference on sale of stock . . . . . . . . . . . . . . . . . . . 5 - -
Change in federal statutory rate . . . . . . . . . . . . . . . . . . . . . - - (3)
FSC tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) (2) (3)
Miscellaneous other items . . . . . . . . . . . . . . . . . . . . . . . . . 2 - 1
- -------------------------------------------------------------------------------------------------------------------------
Actual income tax expense . . . . . . . . . . . . . . . . . . . . . . . . $ 56 $ 53 $ 42
=========================================================================================================================
"Effective" tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . 41.8% 36.0% 32.0%
</TABLE>
Significant components of the net deferred tax assets at December 31, 1995
and 1994, were:
<TABLE>
<CAPTION>
(Amounts in millions) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets Arising From:
Retiree medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 148 $ 145
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1
Employee benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 12
Environmental reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 11
Warranty reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8
Recoverable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9
Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 14
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 21
- -------------------------------------------------------------------------------------------------------------------------
Total Deferred Tax Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 229
- -------------------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities Arising From:
Property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 41
Taxes provided on unremitted foreign earnings . . . . . . . . . . . . . . . . . . . . . . . 25 25
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 46
- -------------------------------------------------------------------------------------------------------------------------
Total Deferred Tax Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 112
- -------------------------------------------------------------------------------------------------------------------------
Net Deferred Tax Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130 $ 117
=========================================================================================================================
</TABLE>
During the third quarter of 1993, a tax bill was enacted which increased
the federal statutory tax rate on the income of corporations from 34 percent to
35 percent. Due to the tax law change, deferred tax assets increased $11
million, of which $8 million was a reduction in goodwill related to the
acquisition of the assets of the Westinghouse Electrical Systems Division and
$3 million was a reduction in current-year tax expense.
Domestic and foreign earnings from continuing operations before income
taxes for the three years ended December 31, 1995, as shown below, exclude
profits recorded on intercompany sales. Net interest expense is allocated
between geographic segments based on non-cash assets.
<TABLE>
<CAPTION>
(Amounts in millions) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 121 $ 139 $131
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 10 2
- -----------------------------------------------------------------------------------------------------------------------
Total earnings from continuing operations
before income taxes and extraordinary item . . . . . . . . . . . . . . . $ 135 $ 149 $133
=======================================================================================================================
</TABLE>
Profits recorded on intercompany sales from foreign entities excluded above
were $19 million, $15 million, and $4 million, in 1995, 1994, and 1993,
respectively, and were earned primarily by the Company's Singapore
subsidiaries.
At December 31, 1995, total assets of operations outside the United States
were $188 million after deducting $26 million due from the Company's domestic
operations. The Company's year-end 1995 equity in its foreign operations was
$178 million.
In 1994, recognizing the increase in business opportunities outside the
U.S., and in the Far East region in particular, the Company adjusted its
planning to recognize that foreign earnings previously earmarked for
repatriation would now be considered permanently invested and used for capital
investment. As of December 31, 1995 and 1994, the
40
<PAGE> 43
Company had not provided federal income taxes on $63 million and $67 million,
respectively, of undistributed earnings recorded by certain subsidiaries
outside the United States, since these earnings were deemed permanently
invested.
For the years 1984 and 1985, the IRS has proposed to increase the Company's
taxable income by approximately $225 million based upon the IRS' assertion that
certain intercompany loans between the Company and its Sunpac subsidiary in
Singapore should be taxed as if they were dividends to the Company. On July
31, 1995, the Company filed a petition with the U.S. Tax Court requesting a
redetermination of the asserted deficiency related to this issue. While the
amount of the proposed adjustment is material, the Company does not believe the
IRS' position will be sustained.
During 1992, the U.S. Tax Court issued an opinion adverse to the Company
for the years 1979 through 1982 related to the issue of whether the payments
made upon the resolution of previous government contracts disputes could reduce
taxable income in the years in which the revenues from the contracts were
reported. In October 1994, the Company ceased its efforts to reverse this
decision and made a payment of $18 million to the IRS which did not have a
material financial impact on the Company. Additionally, during 1994, the IRS
informed the Company that it was disallowing a deduction for the $115 million
in payments pursuant to the agreement dated August 29, 1988, which settled the
government contracts disputes. While the potential impact of this disallowance
is material, the Company does not believe that the IRS' position will be
substantially sustained.
The Company believes that its recorded tax and interest provisions are
sufficient to cover the final resolution of any tax deficiencies.
NOTES PAYABLE AND LONG-TERM DEBT
Notes payable consist of commercial paper and bank borrowings and were $168
million and $194 million at an average interest rate of 6.1 percent and 6.3
percent at December 31, 1995 and 1994, respectively. At December 31, 1995, the
Company maintained domestic revolving credit facilities totaling $335 million.
Commitment fees incurred in 1995 were not material. The Company also
maintained foreign lines of credit for use in its foreign operations totaling
the equivalent of approximately $20 million at December 31, 1995.
Under a long-term debt agreement in place at December 31, 1995, payments of
dividends are limited by the requirement to maintain a minimum level of net
worth. At December 31, 1995, net worth exceeded the maintenance level by $251
million.
The composition of long-term debt at December 31, 1995 and 1994, was:
<TABLE>
<CAPTION>
(Amounts in millions) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
11.05% notes due 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5 $ 15
9.48% notes due 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 100
9.15% notes due 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 50
9.34% notes due 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 50
Other, including $16 million of variable rate debt,
weighted average 4.3% at December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . 23 32
- -------------------------------------------------------------------------------------------------------------------------
228 247
Less amount due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 11
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt (less current portion) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 221 $ 236
=========================================================================================================================
</TABLE>
In November 1995, the Company arranged a private shelf facility with the
Prudential Insurance Company of America under which the Company may issue up
to $150 million of long-term debt in the private market through November 1998.
In December 1993, the Company recorded an extraordinary loss of $8 million
before taxes, or $5 million after taxes, for the early retirement of debt. The
extraordinary loss was due to the redemption premiums paid to holders of the
9.375% bonds and the 12.0% notes, and the writeoff of capitalized debt issuance
costs associated with these instruments.
Total principal payments required under long-term debt agreements for the
five years subsequent to December 31, 1995, are $7 million in 1996, $3 million
in 1997, $6 million in 1998, $1 million in 1999, and less than $1 million in
2000.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Company is party to financial instruments
with off-balance-sheet risk to meet financing needs and to reduce its own
exposure to fluctuations in exchange rates. These financial instruments
include financial guarantees and forward exchange contracts. These instruments
involve, to varying degrees, elements of credit and/or exchange rate risk in
excess of the amount recognized in the financial statements.
Financial guarantees are conditional commitments issued by the Company to
guarantee the payment of certain liabilities of unconsolidated affiliates and
unaffiliated entities to third parties. These guarantees are issued primarily
to support borrowing arrangements, and are scheduled to expire, subject to
extension, from 1996 to 2000. The Company's exposure for financial guarantees
is equal to the contractual amount of these guarantees. The contractual
amounts and the maximum credit loss in the event of non-performance at December
31, 1995, were both $9 million.
41
<PAGE> 44
Notes to Consolidated Financial Statements
Forward exchange contracts are contracts for delivery or purchase of
foreign currencies at specified future dates. For forward exchange contracts,
the contract amounts represent currency exposure if the other party fails to
perform under the contract. At December 31, 1995, the Company had forward
exchange contracts maturing primarily during 1996 to sell the equivalent of
$103 million and to purchase the equivalent of $58 million in foreign currency.
These contracts included $132 million which the Company used to limit its
exposure to foreign currency fluctuations related to specific assets and
liabilities denominated in a foreign currency, primarily the French franc. The
remaining $29 million was used to limit the effects of foreign currency
fluctuations on anticipated Singapore dollar cash flow, based on forecasted
monthly expenditures. Had all of the forward exchange contracts matured on
December 31, 1995, the Company's cash requirement would have been immaterial.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates their fair value.
Foreign currency exchange contracts: The fair value of the Company's
foreign exchange contracts is estimated based on quoted market prices of
comparable contracts.
Short- and long-term debt: The carrying amounts of the Company's
borrowings under its commercial paper programs, its short-term revolving credit
agreements, and variable rate long-term debt instruments approximate their fair
value. The fair value of the Company's other long-term debt is estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1995 and 1994, were:
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(Amounts in millions) Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 75 $ 75 $ 66 $ 66
Foreign exchange contracts . . . . . . . . . . . . . . . . - 2 - -
Short-term debt . . . . . . . . . . . . . . . . . . . . . . 168 168 194 194
Long-term debt . . . . . . . . . . . . . . . . . . . . . . 228 267 247 257
</TABLE>
LEASE ARRANGEMENTS AND RENT EXPENSE
Rent and lease expense for the years 1995, 1994, and 1993 were $15 million, $15
million, and $16 million, respectively. The Company leases certain facilities
and equipment under operating leases, many of which contain renewal options and
escalation clauses. Minimum future rental commitments under noncancelable
operating leases which extend beyond one year are payable as follows: 1996, $9
million; 1997, $7 million; 1998, $5 million; 1999, $5 million; 2000, $5
million; and after 2000, $12 million. Facilities and equipment under capital
leases, minimum future rentals receivable under subleases, and contingent
rental expenses were not significant for the years 1995, 1994, and 1993.
STOCK INCENTIVE PLAN
During 1992, the Company established a stock incentive plan, which was approved
by the Company's shareholders at the April 20, 1993, Annual Meeting. The plan
permits up to a maximum of 3.6 million shares of common stock to be granted as
nonqualified and incentive stock options and restricted stock to managerial,
supervisory, and professional employees. The options are granted, at fair
market value, for a term of 10 years and become exercisable in increments of 25
percent of an individual grant on each of the second through fifth anniversary
dates of the grant. The approval of this plan included the immediate
conversion to Restricted Stock of 891,040 rights under the Company's Phantom
Stock Plan and 205,600 rights under the Company's Cash Equivalent Program. In
addition, during 1995 and 1994, the Company sold 119,500 and 164,550 shares,
respectively, of restricted stock to managerial employees. The restricted
stock may not be resold until the restrictions placed on these shares expire.
The amount of compensation represented by the sale of restricted stock is being
amortized over a nine-year vesting period.
Transactions involving stock options for the plan are summarized as
follows:
<TABLE>
<CAPTION>
Per Share
Number of Option
Stock Options Options Price
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding January 1, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 721,850 $19.32
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,200 18.53-21.92
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,900) 19.32
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
- ------------------------------------------------------------------------------------------------------------------------
Outstanding December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 688,150 18.53-21.92
- ------------------------------------------------------------------------------------------------------------------------
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 629,900 22.38-23.78
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,800) 19.32
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,722) 19.32
- ------------------------------------------------------------------------------------------------------------------------
Outstanding December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,283,528 18.53-23.78
- ------------------------------------------------------------------------------------------------------------------------
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,400 32.24-33.03
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35,112) 19.32-22.38
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (159,982) 19.32-22.38
- ------------------------------------------------------------------------------------------------------------------------
Outstanding December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,308,834 18.53-33.03
========================================================================================================================
Exercisable December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,958 18.53-21.92
========================================================================================================================
</TABLE>
42
<PAGE> 45
At December 31, 1995 and 1994, shares available for future grants under
this plan were 629,380 and 934,168, respectively.
RESTRICTED STOCK PLAN
In accordance with the terms of the Company's restricted stock plan, 114,700
and 9,500 shares of common stock were sold to key managerial employees at their
par value during 1995 and 1994, respectively. This common stock may not be
resold until the restrictions placed on these shares expire. The amount of
compensation represented by the sale of restricted stock is being amortized
over a nine-year vesting period. As of December 31, 1995, 206,400 shares were
available for granting under this restricted stock plan.
RESEARCH AND DEVELOPMENT
The Company performs research and development under both Company-funded
programs and under contracts with others, principally the U.S. government.
Company-funded programs include bid and proposal work for both military and
commercial products and research and development. All Company-funded research
and development is expensed as incurred or expensed in accordance with the
Company's policy on contract accounting; customer-funded research and
development is accounted for under the Company's contract accounting policy.
Total research and development expenditures for the years 1995, 1994, and 1993
were $113 million, $109 million, and $127 million, respectively, of which $47
million, $45 million, and $50 million, respectively, was funded by customers.
ENVIRONMENTAL MATTERS
The Company is subject to numerous environmental laws and regulations and is
exposed to liabilities and compliance costs arising from its past and current
handling, processing, storing, and disposal of hazardous substances and wastes.
These liabilities and costs relate to present facilities, former facilities
which have been closed or sold, and to Superfund sites.
The Company continually monitors its operations with respect to potential
environmental issues and has established reserves for onsite and offsite
environmental investigation and remediation costs. The amount reserved with
respect to any site reflects the Company's estimate of its degree of
responsibility, the anticipated method and ultimate cost of remediation and,
when applicable, an assessment of the ability of other potentially responsible
parties (PRPs) to pay their share of such costs. Although the Company believes
its experience provides a reasonable basis for estimating its liability, the
ultimate outcome may differ from the Company's estimates. As additional
information becomes available, the reserves are reevaluated and adjusted as
necessary.
The Company's expenditures from its reserve for remediation and related
studies over the past three years is as follows: 1995 - $3 million; 1994 - $5
million; and 1993 - $5 million. During this same time period, there was a net
addition to the reserve of $1 million.
It is anticipated that expenditures from the environmental reserve will be
$5 million in 1996 and $5 million in 1997. Although the Company believes that
its environmental reserve is adequate, due to changed circumstances or the
discovery of new sites at which the Company is liable, additional accruals
could be required in the future that could have a material effect on the
results of operations in a particular quarter or annual period. However, the
Company believes it is unlikely that there would be any material adverse effect
on the Company's overall financial position.
Environmental expenditures that relate to the day-to-day activities of
current operations are expensed or capitalized as appropriate. These
expenditures are in addition to the reserve spending. Such expenditures in
1995, 1994, and 1993 were not material and are not expected to be material in
1996 and 1997.
With respect to present and former plant sites where the Company is
presently conducting remediations, such remediations are being conducted
pursuant to plans which have been submitted to the appropriate regulatory
agencies. For each of these plant sites, the established reserve is believed
to be adequate to conduct the required remediation. At certain present and
former plant sites, the Company is in the process of evaluating whether
remediation will be required or whether the existing contamination is
attributable to the Company's activities. Because of the early stage of the
evaluation at some of these sites, the Company cannot determine whether the
applicable reserve will need to be adjusted.
Under the Superfund laws, the Company participates as a PRP at 29 sites
where environmental remediation is being or will be conducted. At 25 of these
sites, the Company anticipates that it will be able to conclude its
participation by settling as a de minimis PRP. At two of the Superfund sites,
the Company, based upon the volume of waste being attributed to it, will not be
able to effect a de minimis resolution. The Company believes, based upon its
evaluation of its exposure and the information available from its activity with
PRP groups, that its reserve is adequate to satisfy its liability with respect
to these 27 sites.
43
<PAGE> 46
Notes to Consolidated Financial Statements
The two remaining Superfund sites are located in Rockford, Illinois. At
one of the sites, the PRP group, in which the Company participates, has entered
into consent decrees with the Illinois Environmental Protection Agency relating
to certain investigations and interim remediations which are substantially
complete. The PRP group is currently finalizing the results of the
investigations to determine the scope of remediation. The Company has
established a reserve for this site which it believes, based upon its
evaluation of its exposure and information presently known, is adequate to
resolve its liability.
The second Superfund site in Rockford relates to a regional area of
groundwater contamination, much of which is located in a highly industrialized
area and which involves multiple sources. The Company is alleged to be linked
to the site as one of the possible sources. However, due to the location,
breadth of contamination, and probable multiple sources, the Department of
Justice and the City of Rockford have been seeking a global solution which would
involve the businesses located in the area. The Company believes this type of
solution is likely and, therefore, its reserve for this site is based upon the
assumption that such a solution will occur. Due to the many uncertainties
which exist, including the sources, level of contamination, financial viability
of potential PRPs, undetermined remediation, and the strength of its defenses,
the Company is not able to make any estimates of its potential liability if the
indicated type of solution is not reached.
GOVERNMENT CONTRACT MATTERS
Government contracts generally provide for the termination or the adjustment of
material terms of such contracts at the election of the government, and the
government may pursue contractual, administrative, civil, and criminal remedies
for improper or illegal activities associated with obtaining and performing
government contracts. Administrative remedies include the suspension,
debarment, or ineligibility of all or part of a company from receiving
government contracts and government-approved subcontracts. As is the case with
any company that performs material amounts of business with the federal
government, any such action by the government could have a material impact upon
the Company's business. Management is not currently aware of any such
situations.
During 1995, the Company collected approximately $8 million of the
previously disclosed $10 million settlement related to a contract for the
supply of jet aircraft start units which the U.S. Navy terminated for its
convenience in 1986. An additional amount of approximately $2 million is
expected to be collected before the end of the second quarter of 1996. The
resolution of this issue did not have a material financial impact on the
Company.
SUBSEQUENT EVENT
On February 20, 1996, the Company's Board of Directors authorized a two-for-one
stock split payable as a 100 percent stock dividend to be distributed on March
19, 1996, to shareholders of record on March 5, 1996. All per share amounts,
stock option data, restricted stock data, and market prices of the Company's
common stock have been adjusted or restated to reflect the split.
DIVIDENDS AND STOCK PRICE RANGE (UNAUDITED)
<TABLE>
<CAPTION>
Per share of Common Stock
- ---------------------------------------------------------------------------------------------------------------------------
Price range
Dividends -------------------------
Paid High Low
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Quarter
1995
First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .15 $ 25 7/16 $22 1/4
Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 30 3/4 25 1/8
Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 34 15/16 28 1/2
Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 35 3/8 29 9/16
- ---------------------------------------------------------------------------------------------------------------------------
$ .60
===========================================================================================================================
1994
First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .15 $ 24 1/8 $20 1/2
Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 24 15/16 22 1/4
Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 25 7/8 23 7/16
Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 26 20 5/8
- ---------------------------------------------------------------------------------------------------------------------------
$ .60
===========================================================================================================================
</TABLE>
[Bar chart:]
<TABLE>
<CAPTION>
Stock Price at Year End
(dollars) 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
18.50 20.13 21.00 22.75 35.19
</TABLE>
44
<PAGE> 47
Management's Report
The management of Sundstrand is responsible for the preparation and
presentation of the consolidated financial statements and related financial
information included in this annual report. These have been prepared in
conformity with generally accepted accounting principles consistently applied
and, as such, include amounts based on estimates by management. The
consolidated financial statements have been audited by Ernst & Young LLP, the
Company's independent auditors.
Management also is responsible for maintaining a system of internal
accounting controls which is designed to provide reasonable assurance that
assets are safeguarded and that transactions are executed in accordance with
management's authorization and are properly recorded. To assure the
maintenance of effective internal controls, management adopts and disseminates
policies, procedures and directives; selects and trains qualified personnel;
establishes organizational structures which permit the delegation of authority
and responsibility; and maintains an active program of internal audits and
appropriate follow-up by management.
The management of Sundstrand also recognizes its responsibility to promote
a strong ethical climate throughout the Company. Toward this end, the Company
provides training in ethical decision making to each employee. In addition,
each employee receives a copy of the Company's manual on Business Conduct and
Ethics.
The Board of Directors elects an Audit Committee from among its members who
are not employees of the Company. The Audit Committee meets periodically with
management, the internal auditors, and the independent auditors to review the
work of each and satisfy itself that they are properly discharging their
responsibilities. Both the independent auditors and internal auditors have
free access to the Audit Committee, without the presence of management, to
discuss internal accounting controls, auditing, and financial reporting
matters.
/s/ Robert H. Jenkins /s/ Paul Donovan
- ----------------------- ---------------------------
Robert H. Jenkins Paul Donovan
President and Executive Vice President
Chief Executive Officer and Chief Financial Officer
February 20, 1996
- ------------------------------------------------------------------------------
Independent Auditor's Report
To the Shareholders and Board of Directors, Sundstrand Corporation
We have audited the accompanying consolidated balance sheets of Sundstrand
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sundstrand
Corporation and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 26, 1996
(Except for the Subsequent Event note, as to which the date is February 20,
1996)
45
<PAGE> 48
Additional 10-K Information
DATE OF INCORPORATION
The Company was incorporated in Illinois in 1910 and became a Delaware
corporation in 1966.
MATERIALS AND SUPPLIES
The Company uses many raw and finished materials of primary and alloy-type
metal in forms such as cast, forged, sheet, and bar, which are generally
available from multiple sources. In addition, mechanical and electronic
materials and supplies such as fasteners, bearings, gaskets, filters, motors,
resistors, transformers, and semiconductors are procured from various sources.
The Company deals with numerous suppliers and is not dependent upon any one
manufacturer or supplier of materials, supplies, or services. However, from
time to time, general shortages of particular raw materials and supplies may
have an adverse effect on the Company.
INTELLECTUAL PROPERTY RIGHTS
The Company owns a large number of patents (expiring through 2012) and other
intellectual property rights and interests, e.g., trademarks, trade secrets,
and licenses, which are of importance in the aggregate to the conduct of its
business and are expected to be of value in the future. In the judgment of the
Company, its patents and other intellectual property rights and interests are
adequate for the conduct of its business, but the loss or expiration of any
single or group of patents or other intellectual properties or interests would
not materially affect the conduct of its business as a whole. In the Company's
opinion, its design, manufacturing and marketing skills, experience, and
reputation are as responsible for its positions in the markets it serves as are
its patents and other intellectual property rights and interests.
PROPERTIES
The Company occupies building space totaling approximately 6.6 million square
feet, which is divided by business segment as follows: Industrial, 2.9 million
square feet; Aerospace, 3.5 million square feet; and corporate offices, .2
million square feet. All building space is owned by the Company, except
approximately .8 million square feet of leased space, and is well maintained,
in good operating condition, and suitable for its operations. The Company owns
approximately 200 acres of vacant land for future expansion.
Aerospace domestic manufacturing facilities are located in Phoenix,
Arizona; San Diego, California; Denver and Grand Junction, Colorado; Rockford,
Illinois; York, Nebraska; Lima, Ohio; and Santa Isabel, Puerto Rico.
Aerospace foreign manufacturing facilities are located in the Republic of
Singapore.
Industrial domestic manufacturing facilities are located in Auburn,
Alabama; Arvada, Colorado; Michigan City, Indiana; Acton, Massachusetts;
Ivyland, Pennsylvania; and Milwaukee, Wisconsin.
Industrial foreign manufacturing facilities are located in Eastbourne,
England; and Dijon, Montbrison, Pont-St.-Pierre, and St. Priest, France.
COMPETITION
The Company has competitors or potential competitors in each of its product
lines. Some of these competitors or potential competitors may have greater
financial and personnel resources than the Company. The Company believes that
its research and development, proprietary technology, and product and service
reputations have been of particular significance in maintaining the Company's
competitive standing.
46
<PAGE> 49
Selected Financial Data, 1991-1995
Sundstrand Corporation and Subsidiaries (SNS)
<TABLE>
<CAPTION>
Year ended December 31, 1995(a) 1994(b) 1993 1992(c)(d)(e) 1991(d)(e)
- -----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in millions except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net Sales
Aerospace . . . . . . . . . . . . . . . . . . . . . . . . $ 726 $ 710 $ 754 $ 840 $ 808
Industrial . . . . . . . . . . . . . . . . . . . . . . . 747 663 629 639 646
- -----------------------------------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,473 $ 1,373 $ 1,383 $ 1,479 $ 1,454
=============================================================================================================================
Operating Profit
Aerospace . . . . . . . . . . . . . . . . . . . . . . . . $ 54 $ 88 $ 106 $ 91 $ 128
Industrial . . . . . . . . . . . . . . . . . . . . . . . 121 106 84 82 78
- -----------------------------------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $ 175 $ 194 $ 190 $ 173 $ 206
=============================================================================================================================
Earnings from continuing operations before
income taxes, extraordinary item, and cumulative
effect of accounting change . . . . . . . . . . . . . . . . $ 135 $ 149 $ 133 $ 110 $ 146
Net earnings from continuing operations before extraordinary
item and cumulative effect of accounting change . . . . . . $ 79 $ 96 $ 91 $ 70 $ 88
Net earnings (loss) available for common shares . . . . . . . $ 79 $ 96 $ 141 $ (122) $ 109
Return on average equity, after tax . . . . . . . . . . . . . 16.2% 19.0% 27.0% (19.9%) 16.5%
- -----------------------------------------------------------------------------------------------------------------------------
Per Share of Common Stock(f)
Earnings from continuing operations before extraordinary
item and cumulative effect of accounting change . . . . . . $ 1.25 $ 1.46 $ 1.28 $ .97 $ 1.23
Earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 1.25 $ 1.46 $ 1.98 $ (1.68) $ 1.51
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . $ .60 $ .60 $ .60 $ .588 $ .55
Market value - high . . . . . . . . . . . . . . . . . . . . . $ 35.38 $ 26.00 $ 22.38 $ 23.63 $ 18.50
low . . . . . . . . . . . . . . . . . . . . . $ 22.25 $ 20.50 $ 17.50 $ 15.56 $ 11.69
year-end . . . . . . . . . . . . . . . . . . . $ 35.19 $ 22.75 $ 21.00 $ 20.13 $ 18.50
Book value . . . . . . . . . . . . . . . . . . . . . . . . . $ 7.80 $ 7.80 $ 7.65 $ 7.33 $ 9.59
- -----------------------------------------------------------------------------------------------------------------------------
Year-End Financial Position
Working capital . . . . . . . . . . . . . . . . . . . . . . . $ 323 $ 303 $ 365 $ 490 $ 643
Current ratio . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1.7 2.1 2.2 3.4
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 1,593 $ 1,587 $ 1,512 $ 1,780 $ 1,687
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 228 $ 247 $ 255 $ 420 $ 455
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . $ 396 $ 441 $ 282 $ 479 $ 455
Shareholders' equity . . . . . . . . . . . . . . . . . . . . $ 481 $ 494 $ 512 $ 530 $ 693
Ratio of total debt to total capital . . . . . . . . . . . . 45.2% 47.1% 35.5% 47.5% 39.6%
Shares outstanding at year end (in millions) . . . . . . . . 30.8 31.6 33.5 36.1 36.1
- -----------------------------------------------------------------------------------------------------------------------------
Other Data
Orders received
Aerospace . . . . . . . . . . . . . . . . . . . . . . . . $ 896 $ 736 $ 527 $ 886 $ 685
Industrial . . . . . . . . . . . . . . . . . . . . . . . 761 701 625 641 626
- -----------------------------------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,657 $ 1,437 $ 1,152 $ 1,527 $ 1,311
=============================================================================================================================
Unfilled orders
Aerospace . . . . . . . . . . . . . . . . . . . . . . . . $ 769 $ 599 $ 572 $ 799 $ 753
Industrial . . . . . . . . . . . . . . . . . . . . . . . 162 148 110 115 113
- -----------------------------------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $ 931 $ 747 $ 682 $ 914 $ 866
=============================================================================================================================
Property, plant, and equipment (excluding leased equipment):
Additions, at cost . . . . . . . . . . . . . . . . . . . $ 62 $ 54 $ 56 $ 75 $ 64
Depreciation . . . . . . . . . . . . . . . . . . . . . . $ 61 $ 61 $ 69 $ 66 $ 60
Approximate number of employees . . . . . . . . . . . . . . . 9,200 9,200 9,300 10,800 10,800
Approximate number of shareholders of record . . . . . . . . 3,700 4,000 4,100 4,300 4,500
</TABLE>
(a) Includes a restructuring charge of $58 million before taxes ($40 million
after taxes equivalent to $.64 per share) related to the reduction of
manufacturing capacity and the divestiture of two non-core product
lines.
(b) Includes a reduction of depreciation expense related to a change in
depreciable lives of $9 million before taxes ($6 million after taxes
equivalent to $.08 per share).
(c) Includes charges of $35 million before taxes ($22 million after taxes
equivalent to $.31 per share) for restructuring of, and reduction in
employment in the Aerospace segment. Also includes charges of $17
million before taxes ($11 million after taxes equivalent to $.15 per
share), exclusive of the cumulative effect, associated with the adoption
of SFAS No. 106 and a credit of $9 million before taxes ($6 million
after taxes equivalent to $.08 per share) resulting from a change in
pension cost assumptions.
(d) Provisions for interest charges for the anticipated resolution of
certain tax disputes were $2 million before taxes ($1 million after
taxes equivalent to $.02 per share) in 1992, and $2 million before taxes
($1 million after taxes equivalent to $.02 per share) in 1991.
(e) Amounts restated to reflect the Company's Sundstrand Data Control
division as a discontinued operation.
(f) Amounts adjusted or restated to reflect the effects of the Company's
two-for-one stock split payable in the form of a 100 percent stock
dividend authorized by the Board of Directors on February 20, 1996.
47
<PAGE> 50
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C>
Don R. O'Hare(4) Thomas G. Pownall(1,2)
Chairman of the Board Retired Chairman
Sundstrand Corporation Martin Marietta Corporation
Director since 1979 Director since 1978
Robert H. Jenkins John A. Puelicher(3,4)
President and Chief Executive Officer Retired Chairman
Sundstrand Corporation Marshall & Ilsley Corporation
Director since 1995 Director since 1977
J. P. Bolduc(1,2,4) Ward Smith(2,3)
Chairman and Chief Executive Officer Retired Chairman
JPB Enterprises, Inc. NACCO Industries, Inc.
Director since 1991 Director since 1983
Gerald Grinstein(2,3) Robert J. Smuland
Retired Chairman Executive Vice President and Chief Operating Officer, Aerospace
Burlington Northern Santa Fe Corporation Sundstrand Corporation
Director since 1991 Director since 1993
Charles Marshall(1,2) Berger G. Wallin
Retired Vice Chairman Executive Vice President for Special Projects
American Telephone and Telegraph Company Sundstrand Corporation
Director since 1989 Director since 1995
Klaus H. Murmann(1,3) (1)Nominating Committee
Chairman and Chief Executive Officer (2)Audit Committee
Sauer, Inc. (3)Compensation Committee
Chairman of the Confederation of German Employers' (4)Finance Committee
Associations
Director since 1981
Donald E. Nordlund(3,4)
Retired Chairman and Chief Executive Officer
Staley Continental, Inc.
Director since 1976
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
OFFICERS
<S> <C>
Don R. O'Hare Berger G. Wallin
Chairman of the Board Executive Vice President for Special
Elected Chairman of the Projects
Board September 26, 1994; Elected Executive Vice
also Chief Executive Officer President for Special Projects
from September 26, 1994, January 2, 1995; and Executive
to September 30, 1995; Vice President and Chief Operating
consultant to the Company Officer, Industrial, from August 7,
from August 20, 1991, to 1990, to January 1, 1995.
September 25, 1994; and Age 65
Chairman of the Board from
January 1, 1989, to August DeWayne J. Fellows
19, 1991. Vice President and Controller
Age 73 Controller since February 16, 1989;
elected to additional position of
Robert H. Jenkins Vice President August 7, 1990.
President and Chief Executive Age 51
Officer
Elected President and James F. Ricketts
Chief Executive Officer October Vice President and Treasurer
1, 1995; and Executive Vice Elected Vice President and
President, Illinois Tool Works, Treasurer February 28, 1992; and
Inc. from March 1, 1990, to Vice President and Treasurer of
September 30, 1995. Ford New Holland from August 1,
Age 52 1988, to February 27, 1992.
Age 49
Paul Donovan
Executive Vice President and Richard M. Schilling
Chief Financial Officer Vice President and General
Chief Financial Officer since Counsel and Secretary
December 2, 1988; elected to Vice President since April 21,
additional position of Executive 1978; elected to additional
Vice President August 7, 1990. position of Secretary July 21,
Age 48 1988.
Age 58
Robert J. Smuland
Executive Vice President and
Chief Operating Officer, Aerospace
Elected Executive Vice President
and Chief Operating Officer,
Aerospace August 7, 1990.
Age 60
Patrick L. Thomas
Executive Vice President and Chief
Operating Officer, Industrial
Elected Executive Vice President
and Chief Operating Officer,
Industrial January 2, 1995; President
of Milton Roy Company from April 1,
1991, to January 1, 1995; and Vice
President and General Manager of
Sundstrand Fluid Handling from
October 12, 1989, to March 31, 1991.
Age 50
</TABLE>
49
<PAGE> 52
SUNDSTRAND CORPORATE INFORMATION
ANNUAL MEETING
The Company's Annual Meeting will be held in the Wallingford Center at the
Clock Tower Resort & Conference Center, 7801 East State Street, Rockford,
Illinois, on Tuesday, April 16, 1996, at 11:00 a.m. Central Time.
COMMON STOCK INFORMATION
Sundstrand common stock is listed on the New York, Chicago, and Pacific stock
exchanges under the symbol SNS.
SHAREHOLDER INVESTMENT SERVICE
Sundstrand offers to shareholders of its common stock a Shareholder Investment
Service which provides a simple, cost-free way of applying dividends and
voluntary cash investments to purchase additional shares of stock. The Company
absorbs brokerage commissions and bank service fees for all participants.
Requests for information about the Shareholder Investment Service should be
directed to the Company's transfer agent.
TRANSFER AGENT
Requests for information about stock registration, stock transfers, dividend
disbursements or the Shareholder Investment Service should be directed to the
Company's transfer agent.
<TABLE>
<S> <C>
Address correspondence to: With questions, call:
Harris Trust and Savings Bank Jacquelyne L. Mansfield
Corporate Trust Operations - 11th Floor Administrative Assistant
311 West Monroe Street Harris Trust and Savings Bank
Chicago, Illinois 60606 (312) 461-6838
</TABLE>
FORM 10-K AND OTHER FINANCIAL PUBLICATIONS
A copy of the Company's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, and other financial publications may be
obtained without charge by writing to Investor Relations at the address
indicated below or by voice mail at (815) 226-2988.
INVESTOR RELATIONS
Analyst inquiries should be directed to:
Craig Watson
Director, Investor Relations
Sundstrand Corporation
4949 Harrison Avenue
P.O. Box 7003
Rockford, Illinois 61125-7003
(815) 226-2136
50
<PAGE> 53
SUNDSTRAND CORPORATION
4949 Harrison Avenue
P.O. Box 7003
Rockford, Illinois 61125-7003
Phone (815) 226-6000
Fax (815) 226-2699
AEROSPACE SEGMENT
Sundstrand Aerospace
Rockford, Illinois
INDUSTRIAL SEGMENT
Milton Roy Company
Arvada, Colorado
The Falk Corporation
Milwaukee, Wisconsin
Sullair Corporation
Michigan City, Indiana
Printed in U.S.A.
[Inside Back Cover]
<PAGE> 54
[Sundstrand Corporation Trademark: Circle S Logo]
Sundstrand Corporation
4949 Harrison Avenue
P.O. Box 7003
Rockford, Illinois 61125-7003
U.S.A.
[SNS Listed NYSE: New York Stock Exchange logo]
[Back Cover]
<PAGE> 1
EXHIBIT (21)
Subsidiaries of Registrant
The following lists each of the Registrant's significant domestic and
foreign subusidiaries.
<TABLE>
<CAPTION>
Percent
Jurisdiction of Voting
in Which Securities
Name of Corporation Incorporated Owned
- ------------------- --------------- -----------
<S> <C> <C>
Milton Roy Company . . . . . . . . . . . . . . . . . Pennsylvania 100%
The Falk Corporation . . . . . . . . . . . . . . . . Delaware 100%
Sullair Corporation. . . . . . . . . . . . . . . . . Indiana 100%
</TABLE>
<PAGE> 1
EXHIBIT (23)(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-29234) pertaining to the Sundstrand Corporation Employee
Savings Plan, the Registration Statement (Form S-8 No. 33-29235) pertaining to
the Sundstrand Corporation Rockford Factory Employee Savings Plan, the
Registration Statement (Form S-8 No. 33-53228) pertaining to the Sundstrand
Corporation Personal Investment Plan, the Registration Statement (Form S-8 No.
33-61372) pertaining to the Sundstrand Corporation Stock Incentive Plan, and the
Registration Statement (Form S-8 No. 33-58689) pertaining to the Sundstrand
Corporation Nonemployee Director Stock Option Plan and the Sundstrand
Corporation Nonemployee Director Compensation Plan of our report dated January
26, 1996, (except for the Subsequent Event note, as to which the date is
February 20, 1996), with respect to the consolidated financial statements of
Sundstrand Corporation incorporated by reference in the Annual Report (Form
10-K) for the year ended December 31, 1995.
/s/ERNST & YOUNG LLP
Chicago, Illinois
March 4, 1996
<PAGE> 1
Exhibit (24)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, SUNDSTRAND
CORPORATION, a Delaware corporation, does hereby nominate, constitute and
appoint ROBERT H. JENKINS and PAUL DONOVAN, and either or both of them, as its
true and lawful attorneys-in-fact, in its name and on its behalf to file with
the Securities and Exchange Commission the Annual Report on Form 10-K of said
Corporation for the year ended December 31, 1995, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
That each of the undersigned directors and officers of said Corporation
does hereby nominate, constitute and appoint ROBERT H. JENKINS and PAUL
DONOVAN, and either or both of them, as his true and lawful attorneys-in-fact,
in his name and in the capacity indicated below, to execute the aforesaid Form
10-K.
And the undersigned do hereby authorize and direct the said
attorneys-in-fact, and either or both of them, to execute and deliver such
other documents to the Securities and Exchange Commission and to take all such
other action as they or either of them may consider necessary or advisable to
the end that said Form 10-K shall comply with the Securities Exchange Act of
1934 and the applicable rules, rulings and regulations of the Securities and
Exchange Commission.
IN WITNESS WHEREOF, each of the undersigned has subscribed these presents
this 20th day of February, 1996.
SUNDSTRAND CORPORATION
By: /s/ Robert H. Jenkins
-----------------------------
Robert H. Jenkins
President and Chief
Executive Officer
(CORPORATE SEAL)
ATTEST:
/s/ Richard M. Schilling
- ------------------------
Richard M. Schilling
Secretary
<PAGE> 2
SIGNATURE TITLE
- --------- -----
/s/ Robert H. Jenkins
- ------------------------ President and Chief Executive
Robert H. Jenkins Officer and Director
/s/ Paul Donovan
- ------------------------ Executive Vice President and
Paul Donovan Chief Financial Officer
/s/ DeWayne J. Fellows Vice President and Controller
- ------------------------
DeWayne J. Fellows
/s/ Don R. O'Hare Chairman of the Board
- ------------------------
Don R. O'Hare
Director
- ------------------------
J. P. Bolduc
/s/ Gerald Grinstein Director
- ------------------------
Gerald Grinstein
/s/ Charles Marshall Director
- ------------------------
Charles Marshall
/s/ Klaus H. Murmann Director
- ------------------------
Klaus H. Murmann
<PAGE> 3
SIGNATURE TITLE
- --------- ----------
/s/ Donald E. Nordlund Director
- ----------------------
Donald E. Nordlund
/s/ Thomas G. Pownall Director
- ----------------------
Thomas G. Pownall
/s/ John A. Puelicher Director
- ----------------------
John A. Puelicher
/s/ Ward Smith Director
- ----------------------
Ward Smith
/s/ Robert J. Smuland Director
- ----------------------
Robert J. Smuland
/s/ Berger G. Wallin Director
- ----------------------
Berger G. Wallin
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 75
<SECURITIES> 0
<RECEIVABLES> 281
<ALLOWANCES> 0
<INVENTORY> 330
<CURRENT-ASSETS> 761
<PP&E> 1,062
<DEPRECIATION> 613
<TOTAL-ASSETS> 1,593
<CURRENT-LIABILITIES> 438
<BONDS> 221
0
0
<COMMON> 19
<OTHER-SE> 462
<TOTAL-LIABILITY-AND-EQUITY> 1,593
<SALES> 1,473
<TOTAL-REVENUES> 1,473
<CGS> 957
<TOTAL-COSTS> 1,312
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> 135
<INCOME-TAX> 56
<INCOME-CONTINUING> 79
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 0
</TABLE>
